-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qfegsf4HVCR0QSVE+ubXLNTBlChSYv6w/hkutaCxhOMZ+UZMXpYxkNPX01Tcx54U EOodRh0iljihU2r6AFwhAg== 0000950130-99-005109.txt : 19990902 0000950130-99-005109.hdr.sgml : 19990902 ACCESSION NUMBER: 0000950130-99-005109 CONFORMED SUBMISSION TYPE: SC 14D1 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19990901 GROUP MEMBERS: PROCTER & GAMBLE CO GROUP MEMBERS: TENZING, INC. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: RECOVERY ENGINEERING INC CENTRAL INDEX KEY: 0000818203 STANDARD INDUSTRIAL CLASSIFICATION: REFRIGERATION & SERVICE INDUSTRY MACHINERY [3580] IRS NUMBER: 411557115 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: SC 14D1 SEC ACT: SEC FILE NUMBER: 005-44835 FILM NUMBER: 99704774 BUSINESS ADDRESS: STREET 1: 9300 NORTH 75TH AVENUE CITY: MINNEAPOLIS STATE: MN ZIP: 55428 BUSINESS PHONE: 6123155500 MAIL ADDRESS: STREET 1: 9300 NORTH 75TH AVENUE CITY: MINNEAPOLIS STATE: MN ZIP: 55428 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: PROCTER & GAMBLE CO CENTRAL INDEX KEY: 0000080424 STANDARD INDUSTRIAL CLASSIFICATION: SOAP, DETERGENT, CLEANING PREPARATIONS, PERFUMES, COSMETICS [2840] IRS NUMBER: 310411980 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SC 14D1 BUSINESS ADDRESS: STREET 1: ONE PROCTER & GAMBLE PLZ CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 5139831100 SC 14D1 1 SCHEDULE 14D-1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- SCHEDULE 14D-1 Tender Offer Statement Pursuant to Section 14(d)(1) of the Securities Exchange Act of 1934 ---------------- RECOVERY ENGINEERING, INC. ----------------------------------------------------------------------------- (Name of Subject Company) THE PROCTER & GAMBLE COMPANY TENZING, INC. ----------------------------------------------------------------------------- (Bidders) Common Stock, $.01 Par Value (Including the associated Rights) -------------------------------------------------- (Title of Class of Securities) 756269 10 6 -------------------------------------------------- (CUSIP Number of Common Stock) Terry L. Overbey The Procter & Gamble Company One Procter & Gamble Plaza Cincinnati, Ohio 45202-3315 (513) 983-1100 with a copy to: Stephen Fraidin (P.C.) Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, New York 10004-1930 (212) 859-8000 (Name, address and telephone number of person authorized to receive notices and communications on behalf of bidders) ---------------- Calculation of Filing Fee - -------------------------------------------------- - --------------------------------------------------
Transaction Valuation* Amount of Filing Fee - -------------------------------------------------- $213,098,623 $42,620 - -------------------------------------------------- - --------------------------------------------------
* For purposes of calculating fee only. This amount is based on a per share offering price of $35.25, for 6,045,351 shares of common stock. Pursuant to the Agreement and Plan of Merger, dated as of August 26, 1999 (the "Merger Agreement"), by and among Recovery Engineering, Inc. (the "Company"), The Procter & Gamble Company and Tenzing, Inc. (collectively, the "Bidders"), the Company represented to the Bidders that, as of such date, it had 6,044,601 shares of common stock issued and outstanding and that 750 shares are expected to be issued under the Company's 1994 Stock Purchase Plan be- tween the date of the Merger Agreement and the Closing Date (as defined in the Merger Agreement). The amount of the filing fee, calculated in accor- dance with Rule 0-11 under the Securities Exchange Act of 1934, as amended, equals 1/50 of one percent of the aggregate of the cash offered by the Bid- der. [_]Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. Amount Previously Paid: N/A Filing Party: N/A Form or Registration No.: N/A Date Filed: N/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This Tender Offer Statement on Schedule 14D-1 relates to a tender offer by Tenzing, Inc., a Minnesota corporation ("Offeror"), and a direct wholly owned subsidiary of The Procter & Gamble Company, an Ohio corporation ("Parent"), to purchase all outstanding shares of Common Stock, par value $.01 per share (the "Common Stock"), including the associated stock purchase rights issued pursu- ant to the Rights Agreement, dated as of January 30, 1996, as amended, between the Company and Norwest Bank Minnesota, N.A., as Rights Agent (the "Rights" and, together with the Common Stock, the "Shares"), of Recovery Engineering, Inc., a Minnesota corporation (the "Company"), at a purchase price of $35.25 per Share, net to the seller in cash, without interest, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated September 1, 1999 (the "Offer to Purchase"), and in the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively con- stitute the "Offer"), copies of which are filed as Exhibits (a)(1) and (a)(2) hereto, respectively, and which are incorporated herein by reference. Offeror has been formed by Parent in connection with the Offer and the transactions contemplated thereby. Item 1. Security and Subject Company. (a) The name of the subject company is Recovery Engineering, Inc. The ad- dress of the principal executive offices of the Company is 9300 North 75th Av- enue, Minneapolis, Minnesota 55428. (b) The information set forth in the Introduction and Section 1 ("Terms of the Offer; Expiration Date") of the Offer to Purchase is incorporated herein by reference. (c) The information set forth in Section 6 ("Price Range of Shares") of the Offer to Purchase is incorporated herein by reference. Item 2. Identity and Background. (a) through (d), (g) This Schedule 14D-1 is filed by Parent and Offeror. The information set forth in the Introduction and Section 9 ("Certain Information Concerning Parent and Offeror") of the Offer to Purchase and in Schedule I thereto is incorporated herein by reference. (e) and (f) None of Offeror or Parent or, to the best of their knowledge, any of the persons listed in Schedule I of the Offer to Purchase, has during the last five years (i) been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or fi- nal order enjoining future violations of, or prohibiting activities subject to, federal or state securities laws or finding any violation of such laws. Item 3. Past Contacts, Transactions or Negotiations with the Subject Company. (a) and (b) The information set forth in the Introduction, Section 8 ("Cer- tain Information Concerning the Company"), Section 9 ("Certain Information Concerning Parent and Offeror"), Section 11 ("Background of the Offer") and Section 12 ("Purpose of the Offer and the Merger; Plans for the Company; The Transaction Documents") of the Offer to Purchase is incorporated herein by reference. Item 4. Source and Amount of Funds or Other Consideration. (a) The information set forth in Section 10 ("Source and Amount of Funds") of the Offer to Purchase is incorporated herein by reference. (b) and (c) Not applicable. Item 5. Purpose of the Tender Offer and Plans or Proposals of the Bidder. (a) through (e) The information set forth in the Introduction, Section 12 ("Purpose of the Offer and the Merger; Plans for the Company; The Transaction Documents") and Section 13 ("Dividends and Distribution") of the Offer to Pur- chase is incorporated herein by reference. (f) through (g) The information set forth in Section 7 ("Effect of the Offer on the Market for Shares; Stock Quotation; Exchange Act Registration and Mar- gin Securities") of the Offer to Purchase is incorporated herein by reference. Item 6. Interest in Securities of the Subject Company. (a) None. (b) Not applicable. Item 7. Contracts, Arrangements, Understandings or Relationships with Respect to the Subject Company's Securities. The information set forth in the Introduction, Section 1 ("Terms of the Of- fer; Expiration Date"), Section 9 ("Certain Information Concerning Parent and Offeror"), Section 10 ("Source and Amount of Funds"), Section 11 ("Background of the Offer"), Section 12 ("Purpose of the Offer and the Merger; Plans for the Company; The Transaction Documents"), Section 13 ("Dividends and Distribu- tions") and Section 14 ("Certain Conditions to the Offer") of the Offer to Purchase is incorporated herein by reference. Item 8. Persons Retained, Employed or to be Compensated. The information set forth in the Introduction and Section 16 ("Fees and Ex- penses") of the Offer to Purchase is incorporated herein by reference. Item 9. Financial Statements of Certain Bidders. Not applicable. Item 10. Additional Information. (a) The information set forth in the Introduction, Section 1 ("Terms of the Offer"), Section 9 ("Certain Information Concerning Parent and Offeror"), Sec- tion 11 ("Background of the Offer"), Section 12 ("Purpose of the Offer and the Merger; Plans for the Company; The Transaction Documents"), Section 13 ("Divi- dends and Distributions") and Section 14 ("Certain Conditions to the Offer") of the Offer to Purchase is incorporated herein by reference. (b) and (c) The information set forth in Section 15 ("Certain Regulatory and Legal Matters") of the Offer to Purchase is incorporated herein by reference. (d) The information set forth in Section 7 ("Effect of the Offer on the Mar- ket for Shares; Stock Quotation; Exchange Act Registration and Margin Securi- ties") of the Offer to Purchase is incorporated herein by reference. (e) None. (f) The information set forth in the Offer to Purchase, a copy of which is attached as Exhibit (a)(1), and the Letter of Transmittal, a copy of which is attached as Exhibit (a)(2), is incorporated herein by reference in its entire- ty. Item 11. Material to be Filed as Exhibits. (a)(1) Offer to Purchase, dated September 1, 1999. (a)(2) Letter of Transmittal. (a)(3) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(4) Letter from Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees to Clients. (a)(5) Notice of Guaranteed Delivery. (a)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. (a)(7) Summary Announcement, dated September 1, 1999. (a)(8) Joint Press Release, dated August 26, 1999. (a)(9) Press Release issued by Parent on September 1, 1999. (b) Not applicable. (c)(1) Agreement and Plan of Merger dated as of August 26, 1999, by and among Parent, Offeror and the Company. (c)(2) Tender and Option Agreement, among Parent, Offeror, the Company and the Stockholders Listed on Schedule A thereto, dated as of August 26, 1999. (c)(3) Stock Option Agreement, dated as of August 26, 1999, by and between Parent and the Company. (c)(4) Confidentiality Agreement, between Goldman, Sachs & Co. on behalf of the Company and Parent, dated June 24, 1999, as amended on July 27, 1999. (c)(5) Consulting Agreement, Non-Competition Agreement and Letter of Understanding for Brian F. Sullivan, each dated as of August 26, 1999. (c)(6) Non-Competition Agreement and Letter of Understanding for Reed A. Watson, each dated as of August 26, 1999. (d) None. (e) Not applicable. (f) None. SIGNATURES After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: September 1, 1999 The Procter & Gamble Company /s/ Gretchen W. Price By: ___________________________________ Name: Gretchen W. Price Title:Treasurer Tenzing, Inc. /s/ Gretchen W. Price By: ___________________________________ Name: Gretchen W. Price Title:Vice President and Treasurer EXHIBIT INDEX
Exhibit Description No. ------- --------------- (a)(1) Offer to Purchase, dated September 1, 1999. (a)(2) Letter of Transmittal. Letter to Brokers, Dealers, Commercial Banks, Trust Companies (a)(3) and Other Nominees. (a)(4) Letter from Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees to Clients. (a)(5) Notice of Guaranteed Delivery. Guidelines for Certification of Taxpayer Identification Number (a)(6) on Substitute Form W-9. (a)(7) Summary Announcement, dated September 1, 1999. (a)(8) Joint Press Release, dated August 26, 1999. (a)(9) Press Release issued by Parent on September 1, 1999. (b) Not applicable. (c)(1) Agreement and Plan of Merger dated as of August 26, 1999, by and among Parent, Offeror and the Company. (c)(2) Tender and Option Agreement, among Parent, Offeror, the Company and the Stockholders Listed on Schedule A thereto, dated as of August 26, 1999. (c)(3) Stock Option Agreement, dated as of August 26, 1999, by and between Parent and the Company. (c)(4) Confidentiality Agreement, between Goldman, Sachs & Co. on behalf of the Company and Parent, dated June 24, 1999, as amended on July 27, 1999. (c)(5) Consulting Agreement, Non-Competition Agreement and Letter of Understanding for Brian F. Sullivan, each dated as of August 26, 1999. (c)(6) Non-Competition Agreement and Letter of Understanding for Reed A. Watson, each dated as of August 26, 1999. (d) None. (e) Not applicable. (f) None.
EX-99.(A)(1) 2 OFFER TO PURCHASE Offer to Purchase for Cash All Outstanding Shares of Common Stock (Including the Associated Rights) of RECOVERY ENGINEERING, INC. at $35.25 Net Per Share by TENZING, INC. a direct wholly owned subsidiary of THE PROCTER & GAMBLE COMPANY THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, SEPTEMBER 29, 1999, UNLESS THE OFFER IS EXTENDED. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION DATE (AS DEFINED BELOW) OF THE OFFER THAT NUMBER OF SHARES WHICH WOULD REPRESENT AT LEAST A MAJORITY OF THE OUTSTANDING SHARES ON A FULLY DILUTED BASIS. SEE SECTIONS 12 AND 14. ---------------- THE BOARD OF DIRECTORS OF RECOVERY ENGINEERING, INC. (THE "COMPANY") HAS UNANIMOUSLY APPROVED THE OFFER, THE MERGER AND THE MERGER AGREEMENT REFERRED TO HEREIN AND HAS DETERMINED THAT THE MERGER IS ADVISABLE AND THAT THE TERMS OF THE OFFER AND THE MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND THE SHAREHOLDERS OF THE COMPANY AND RECOMMENDS THAT THE SHAREHOLDERS OF THE COMPANY ACCEPT THE OFFER AND APPROVE THE MERGER AND THE MERGER AGREEMENT. ---------------- IMPORTANT Any shareholder desiring to tender all or any portion of such shareholder's Shares and the associated Rights (each as hereinafter defined) should either (i) complete and sign the Letter of Transmittal (or a facsimile thereof) in ac- cordance with the instructions in the Letter of Transmittal and mail or deliver the certificate(s) representing the tendered Shares, and all other required documents, to the Depositary or tender such Shares pursuant to the procedure for book-entry transfer set forth in Section 3 or (ii) request his broker, dealer, commercial bank, trust company or other nominee to effect the transac- tion for him. A shareholder whose Shares are registered in the name of a bro- ker, dealer, commercial bank, trust company or other nominee must contact such person if he desires to tender such Shares. A shareholder who desires to tender Shares and whose certificates representing such Shares are not immediately available or who cannot comply with the proce- dures for book-entry transfer on a timely basis may tender such Shares by fol- lowing the procedure for guaranteed delivery set forth in Section 3. Questions and requests for assistance may be directed to J.P. Morgan Securities Inc., the Dealer Manager, or to D.F. King & Co., Inc., the Information Agent, at their respective addresses and telephone numbers set forth on the back cover of this Offer to Purchase. Additional copies of this Offer to Purchase, the Letter of Transmittal, the Notice of Guaranteed Delivery and other related ma- terials may be obtained from the Information Agent or from brokers, dealers, commercial banks and trust companies. The Dealer Manager for the Offer is: J.P. Morgan & Co. September 1, 1999 TABLE OF CONTENTS
Page ---- INTRODUCTION.............................................................. 1 1. Terms of the Offer; Expiration Date................................. 4 2. Acceptance for Payment and Payment for Shares....................... 4 3. Procedure for Tendering Shares...................................... 5 4. Withdrawal Rights................................................... 7 5. Certain Federal Income Tax Consequences............................. 7 6. Price Range of Shares............................................... 9 7. Effect of the Offer on the Market for Shares; Stock Quotation; Exchange Act Registration and Margin Securities..................... 9 8. Certain Information Concerning the Company.......................... 10 9. Certain Information Concerning Parent and Offeror................... 13 10. Source and Amount of Funds.......................................... 14 11. Background of the Offer............................................. 14 12. Purpose of the Offer and the Merger; Plans for the Company; The Transaction Documents............................................... 17 13. Dividends and Distributions......................................... 32 14. Certain Conditions to the Offer..................................... 32 15. Certain Regulatory and Legal Matters................................ 33 16. Fees and Expenses................................................... 36 17. Miscellaneous....................................................... 36 SCHEDULE I DIRECTORS AND EXECUTIVE OFFICERS OF PARENT AND OFFEROR.................. I-1
To the Holders of Common Stock of RECOVERY ENGINEERING, INC.: INTRODUCTION Tenzing, Inc., a Minnesota corporation ("Offeror"), and a direct wholly owned subsidiary of The Procter & Gamble Company, an Ohio corporation ("Parent"), hereby offers to purchase all outstanding shares of Common Stock, par value $0.01 per share (the "Common Stock"), inclusive of their respective associated stock purchase rights (the "Rights" and the shares of Common Stock inclusive of their respective Rights, the "Shares"), of Recovery Engineering, Inc., a Minnesota corporation (the "Company"), at a purchase price of $35.25 per Share, net to the seller in cash, without interest (the "Offer Price"), upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which, together with any amendments or supplements hereto or thereto, collectively constitute the "Offer"). The Rights were issued pursuant to the Rights Agreement, dated as of January 30, 1996, as amended (the "Rights Agreement"), between the Company and Norwest Bank Minnesota, N.A., as Rights Agent, and are currently evidenced by and trade with certificates evidencing the Common Stock. See Section 12 for a brief discussion of the Rights Agreement and its application to the Offer and the Merger (as hereinafter defined). Offeror is a corporation newly formed by Parent in connection with the Offer and the transactions contemplated thereby. For information concerning Parent, see Section 9. Tendering shareholders will not be obligated to pay brokerage fees or commis- sions or, except as set forth in Instruction 6 of the Letter of Transmittal, transfer taxes on the purchase of Shares pursuant to the Offer. Offeror will pay all fees and expenses of J.P. Morgan Securities Inc. (the "Dealer Manag- er"), ChaseMellon Shareholder Services, L.L.C., which is acting as the Deposi- tary (the "Depositary") and D.F. King & Co., Inc., which is acting as Informa- tion Agent (the "Information Agent"), incurred in connection with the Offer. See Section 16. THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE OFFER, THE MERGER AND THE MERGER AGREEMENT AND DETERMINED THAT THE MERGER IS ADVISABLE AND THAT THE TERMS OF THE OFFER AND THE MERGER ARE FAIR TO AND IN THE BEST IN- TERESTS OF THE COMPANY AND THE SHAREHOLDERS OF THE COMPANY AND RECOMMENDS THAT THE SHAREHOLDERS OF THE COMPANY ACCEPT THE OFFER AND APPROVE THE MERGER AND THE MERGER AGREEMENT. GOLDMAN, SACHS & CO., THE COMPANY'S FINANCIAL ADVISOR ("GOLDMAN SACHS" OR THE "FINANCIAL ADVISOR"), HAS DELIVERED TO THE BOARD OF DIRECTORS OF THE COMPANY ITS WRITTEN OPINION TO THE EFFECT THAT, AS OF AUGUST 26, 1999, THE CONSIDERA- TION TO BE RECEIVED BY HOLDERS OF SHARES (OTHER THAN PARENT, OFFEROR AND ANY AFFILIATES THEREOF) PURSUANT TO THE MERGER AGREEMENT IS FAIR TO SUCH HOLDERS FROM A FINANCIAL POINT OF VIEW. SUCH OPINION IS SET FORTH IN FULL AS AN ANNEX TO THE COMPANY'S SOLICITATION/RECOMMENDATION STATEMENT ON SCHEDULE 14D-9 (THE "SCHEDULE 14D-9"), WHICH IS BEING MAILED TO SHAREHOLDERS OF THE COMPANY CON- CURRENTLY HEREWITH. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY TEN- DERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION DATE OF THE OFFER THAT NUMBER OF SHARES WHICH WOULD REPRESENT AT LEAST A MAJORITY OF THE OUTSTANDING SHARES ON A FULLY DILUTED BASIS (THE "MINIMUM CONDITION"). SEE SECTIONS 12 AND 14. The Offer is being made pursuant to the Agreement and Plan of Merger, dated as of August 26, 1999 (the "Merger Agreement"), by and among Parent, Offeror and the Company, pursuant to which, after the purchase of the shares pursuant to the Offer and the satisfaction or waiver of certain conditions, Offeror will be merged with and into the Company (the "Merger"). Following the consummation of the Merger, the Company will be the surviving corporation (the "Surviving Corporation"). Offeror may assign its rights under the Merger Agreement to an affiliate. In the Merger, each outstanding Share (other than Shares held by the Company or Parent or any of their respective subsidiaries and other than Shares held by shareholders, if any, who perfect their appraisal rights under the Minnesota Business Corporation Act (the "Minnesota Law") (the "Excluded Shareholders")) will be converted into, and become exchange- 1 able for, the right to receive $35.25 per Share in cash (the "Merger Considera- tion"), without interest thereon, less any required withholding of taxes upon the surrender of certificates formerly representing such Shares and the Company will become a direct wholly owned subsidiary of Parent. See Section 12. If by 12:00 midnight, New York City time, on Wednesday, September 29, 1999 (or any other date or time then set as the Expiration Date), any or all conditions to the Offer have not been satisfied or waived, Offeror reserves the right (but shall not be obligated), subject to the terms and conditions contained in the Merger Agreement and to the applicable rules and regulations of the Securities and Exchange Commission (the "Commission"), to (i) terminate the Offer and not accept for payment any Shares and return all tendered Shares to tendering shareholders, (ii) waive all the unsatisfied conditions (other than the Minimum Condition) and, subject to complying with the terms of the Merger Agreement and the applicable rules and regulations of the Commission, accept for payment and pay for all Shares validly tendered prior to the Expiration Date and not there- tofore withdrawn, (iii) extend the Offer and, subject to the right of share- holders to withdraw Shares until the Expiration Date, retain the Shares that have been tendered during the period or periods for which the Offer is extended or (iv) amend the Offer. The Merger Agreement provides that if any condition to the Offer is not satisfied at the Expiration Date but is reasonably capable of being satisfied within three business days thereof, Offeror shall, and Parent shall cause Offeror to, extend the Offer for three business days and Parent and the Company shall each use reasonable efforts to cause such condition to become satisfied during such three business day period. There can be no assurance that Offeror will exercise its right to extend the Offer. Any extension, waiver, amendment or termination will be followed as promptly as practicable by public announcement thereof. In the case of an ex- tension, Rule 14e-1(d) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires that the announcement be issued no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date in accordance with the public announcement require- ments of Rule 14d-4(c) under the Exchange Act, subject to applicable law (in- cluding Rules 14d-4(c) and 14d-6(d) under the Exchange Act, which require that any material change in the information published, sent or given to shareholders in connection with the Offer be promptly disseminated to shareholders in a man- ner reasonably designed to inform shareholders of such change). Without limit- ing the obligation of Offeror under such rules or the manner in which Offeror may choose to make any public announcement, Offeror will not have any obliga- tion to publish, advertise or otherwise communicate any such public announce- ment other than by issuing a release to the Dow Jones News Service. In the Merger Agreement, Offeror has agreed that it will not, without the prior consent of the Company, extend the Offer if all of the conditions to the Offer have been satisfied, except that Offeror may, in its reasonable discretion without the consent of the Company, extend the Offer (i) if on the scheduled Expiration Date of the Offer any of the conditions to the Offer shall not have been satisfied or waived, (ii) for such period as may be required by any rule, regulation, interpretation or position of the Commission or its staff applica- ble to the Offer, (iii) for any period required by applicable law in connection with an increase in the consideration to be paid pursuant to the Offer, and (iv) if all conditions to the Offer are satisfied or waived but the number of Shares tendered is 80% or more, but less than 90%, of the then outstanding Shares, for an aggregate period of not more than ten business days (for all such extensions under this clause (iv)) beyond the latest expiration date that would be permitted under clause (i), (ii) or (iii) of this sentence. In addi- tion, Offeror has agreed that, without the prior written consent of the Compa- ny, it will not (i) waive the Minimum Condition, (ii) reduce the number of Shares subject to the Offer, (iii) reduce the Merger Consideration, (iv) extend the Offer if all of the Offer conditions are satisfied or waived, (v) change the form of consideration payable in the Offer or (vi) amend or modify any term or condition of the Offer (including the conditions described in Section 14) in any manner adverse to the holders of shares. If Offeror makes a material change in the terms of the Offer or the information concerning the Offer or waives a material condition of the Offer, Offeror will disseminate additional tender offer materials and extend the Offer to the ex- tent required by Rules 14d-4(c), 14d-6(d) and 14e-l under the Exchange Act. The minimum period during which an offer must remain open following material changes in the terms of the offer or information concerning the offer, other than a change in price or a change in the percentage of securities sought, will depend upon the facts and circumstances then existing, including the relative materiality of the changed terms or information. With respect to a change in price or a change in the percentage of securities sought, a minimum period of ten business days is generally required to allow for adequate dissemination to shareholders. Based on the representations and warranties of the Company contained in the Merger Agreement, and information provided by the Company, as of August 25, 1999, (i) 6,044,601 shares of Common Stock were outstanding, (ii) 6,044,601 Rights were outstanding, (iii) no class or series of preferred stock of the Company had been established, 2 (iv) options to purchase 1,279,667 shares of Common Stock which were granted pursuant to the Company's 1986 Stock Option Plan, the Company's 1994 Stock Op- tion and Incentive Plan, and the Company's 1993 Director Stock Option Plan (the "Company Option Plans") were outstanding, (v) no shares of Common Stock were reserved for issuance pursuant to options under the Company Option Plans, (vi) 80,000 shares of Common Stock were reserved for issuance upon exercise of out- standing warrants, (vii) 44,385 shares of Common Stock were reserved for issu- ance pursuant to the Company's 1994 Stock Purchase Plan (the "Company ESPP") (with approximately 750 shares expected to be issued under the Company ESPP be- tween the date of the Merger Agreement and the Closing Date (as defined in the Merger Agreement)) and (viii) up to 1,377,410 shares of Common Stock were re- served for issuance upon conversion of the 5% Convertible Notes due 2003 of the Company (the "Convertible Notes"). The Company represented that the number of Shares issuable upon conversion of the Convertible Notes, based on the Merger Consideration, is 1,010,101 Shares. Pursuant to the Merger Agreement, all stock options and warrants outstanding immediately prior to the Effective Time (as defined in the Merger Agreement) will be cancelled and the holder of such op- tion or warrant will be entitled to receive, for each Share subject to an op- tion or warrant, an amount in cash equal to the excess of $35.25 over the exer- cise price of such option or warrant, without interest. All Convertible Notes outstanding immediately prior to the Effective Time will be cancelled and each holder of such Convertible Note shall be entitled to receive an amount in cash equal to (i) $35.25 times (ii) the number of Shares that would be issuable to such holder upon conversion of the Convertible Notes based on the Merger Con- sideration (i.e., one Share for each $14.85 principal amount of the Convertible Notes). Based on the foregoing, the Minimum Condition will be satisfied if 4,207,560 Shares are validly tendered and not withdrawn prior to the Expiration Date. The number of Shares required to be validly tendered and not withdrawn in order to satisfy the Minimum Condition will increase to the extent additional Shares are deemed to be outstanding on a fully diluted basis. The consummation of the Merger is subject to the satisfaction or waiver of a number of conditions, including, if required, the approval of the Merger by the requisite vote or consent of the shareholders of the Company. Under the Minne- sota Law and the Company's articles of incorporation, the shareholder vote nec- essary to approve the Merger will be the affirmative vote of the holders of at least a majority of the outstanding Shares, including Shares held by Offeror and its affiliates (assuming that neither Parent nor its affiliates or associ- ates are "interested shareholders" of the Company under Minnesota Law). Accord- ingly, if Offeror acquires a majority of the outstanding Shares, Offeror will have the voting power required to approve the Merger without the affirmative vote of any other shareholders of the Company. Furthermore, if Offeror acquires at least 90% of the outstanding Shares pursuant to the Offer or otherwise, Offeror would be able to effect the Merger pursuant to the "short-form" merger provisions of Section 302A.621 of the Minnesota Law, without any action by any other shareholder of the Company. In such event, Offeror intends to effect the Merger as promptly as practicable following the purchase of Shares in the Of- fer. The Merger Agreement is more fully described in Section 12. Concurrently with the execution and delivery of the Merger Agreement, the Com- pany granted to Offeror an option to purchase up to 1,202,875 Shares at a cash price equal to $35.25 per share and on the other terms and subject to the con- ditions set forth in the Stock Option Agreement dated August 26, 1999, by and between the Company and Parent (the "Stock Option Agreement"). For purposes of this Offer to Purchase, any reference to beneficial ownership of Parent or Offeror of Shares or similar references shall exclude Shares subject to the Stock Option Agreement. See Section 12. Concurrently with the execution and delivery of the Merger Agreement, Parent and Offeror entered into a Tender and Option Agreement, dated as of August 26, 1999 (the "Tender and Option Agreement"), with the shareholders listed on Schedule A thereto (the "Major Shareholders"), who collectively have beneficial ownership (as defined pursuant to Rule 13d-3 of the Exchange Act) of 19.3% of the Shares (17.1% of the Shares on a fully diluted basis). Pursuant to the Ten- der and Option Agreement, the Major Shareholders have, among other things, en- tered into a voting agreement with Parent and Offeror, granted an irrevocable proxy to Offeror's designees with respect to their Shares, agreed to tender their Shares in the Offer and agreed to grant to Offeror an option to purchase the Shares held by them at the Offer Price under specified circumstances. For purposes of this Offer to Purchase, any reference to beneficial ownership of Parent or Offeror of Shares or similar references shall exclude Shares subject to the Tender and Option Agreement. The Company has distributed one Right for each outstanding share of Common Stock pursuant to the Rights Agreement. Based on the information disclosed by the Company in the Merger Agreement and in the Schedule 14D-9, in 3 connection with the Company's entering into the Merger Agreement, the Board of Directors authorized an amendment to the Rights Agreement so that the Rights will not affect or be affected by the Merger Agreement, the Tender and Option Agreement or the Stock Option Agreement, the Offer, the announcement of the Of- fer, the purchase of Shares by Parent or Offeror pursuant to the Offer, the Merger or the other transactions contemplated by such agreements. If the Rights Agreement had not been so amended, a distribution of Rights certificates sepa- rate from the Common Stock might have resulted from the Offer, the Merger Agreement, the Tender and Option Agreement or the Stock Option Agreement or any of the respective transactions contemplated thereby. This Offer to Purchase and the related Letter of Transmittal contain important information that should be read carefully before any decision is made with re- spect to the Offer. This Offer to Purchase contains forward-looking statements that involve risks and uncertainties, including the risks associated with sat- isfying the conditions to the Offer. Certain of these risk factors, as well as additional risks and uncertainties, are detailed in the Company's periodic fil- ings with the Commission. 1. Terms of the Offer; Expiration Date. Upon the terms and subject to the conditions to the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), Offeror will accept for payment and pay for all Shares validly ten- dered prior to the Expiration Date and not withdrawn in accordance with Section 4. The term "Expiration Date" means 12:00 midnight, New York City time, on Wed- nesday, September 29, 1999, unless and until Offeror (subject to the terms of the Merger Agreement) shall have extended the period of time during which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date at which the Offer, as so extended by Offeror, shall expire. Consummation of the Offer is conditioned upon satisfaction of the Minimum Con- dition and the other conditions set forth in Section 14. Subject to the terms and conditions contained in the Merger Agreement, Offeror reserves the right (but shall not be obligated) to waive any or all such conditions. The Company is providing Offeror with its list of shareholders and security po- sition listings for the purpose of disseminating the Offer to holders of Shares. This Offer to Purchase and the related Letter of Transmittal and other relevant materials will be mailed by Offeror to record holders of Shares and will be furnished by Offeror to brokers, dealers, commercial banks, trust com- panies and similar persons whose names, or the names of whose nominees, appear on the shareholder lists or, if applicable, who are listed as participants in a clearing agency's security position listing, for subsequent transmittal to ben- eficial owners of Shares. 2. Acceptance for Payment and Payment for Shares. Subject to and in accordance with the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and condi- tions of any such extension or amendment), Offeror will accept for payment and will pay for all Shares validly tendered prior to the Expiration Date, and not properly withdrawn in accordance with Section 4, as soon as practicable after the Expiration Date. Any determination concerning the satisfaction or waiver of such terms and conditions will be within the reasonable discretion of Offeror, and such determination will be final and binding on all tendering shareholders. See Sections 1 and 14. Offeror expressly reserves the right to delay acceptance for payment of, or payment for, Shares in order to comply in whole or in part with any applicable law. Any such delays will be effected in compliance with Rule 14e-1(c) under the Exchange Act (relating to Offeror's obligation to pay for or return tendered Shares promptly after the termination or withdrawal of the Offer). In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (i) certificates for such Shares or timely confirmation (a "Book-Entry Confirmation") of the book-entry transfer of such Shares into the Depositary's account at The Deposi- tory Trust Company or the Philadelphia Depository Trust Company (each a "Book- Entry Transfer Facility" and, collectively, the "Book-Entry Transfer Facili- ties") pursuant to the procedures set forth in Section 3, (ii) a Letter of Transmittal (or facsimile thereof) properly completed and duly executed, with any required signature guarantees, or an Agent's Message (as hereinafter de- fined) in connection with a book-entry transfer and (iii) any other documents required by the Letter of Transmittal. The per Share consideration paid to any shareholder pursuant to the Offer will be the highest per Share consideration paid to any other shareholder pursuant to the Offer. 4 The term "Agent's Message" means a message transmitted by a Book-Entry Transfer Facility to, and received by, the Depositary and forming a part of a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility has received an express acknowledgment from the participant in such Book-Entry Transfer Fa- cility tendering the Shares which are the subject of such Book-Entry Confirma- tion, that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that Offeror may enforce such agreement against such participant. For purposes of the Offer, Offeror will be deemed to have accepted for payment, and thereby purchased, Shares properly tendered to Offeror and not withdrawn as, if and when Offeror gives oral or written notice to the Depositary of Offeror's acceptance for payment of such Shares pursuant to the Offer. Upon the terms and subject to the conditions to the Offer, payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for tendering sharehold- ers for the purpose of receiving payment from Offeror and transmitting payment to tendering shareholders. Under no circumstances will interest be paid on the purchase price of the Shares to be paid by Offeror, regardless of any extension of the Offer or any delay in making such payment. If any tendered Shares are not purchased pursuant to the Offer because of an invalid tender or otherwise, certificates for any such Shares will be returned, without expense to the tendering shareholder (or, in the case of Shares deliv- ered by book-entry transfer of such Shares into the Depositary's account at a Book-Entry Transfer Facility pursuant to the procedures set forth in Section 3, such Shares will be credited to an account maintained at the appropriate Book- Entry Transfer Facility), as promptly as practicable after the expiration or termination of the Offer. Offeror reserves the right to assign to any of its affiliates (including Par- ent) the right to purchase Shares tendered pursuant to the Offer, but any such assignment will not relieve Offeror of its obligations under the Offer and will in no way prejudice the rights of tendering shareholders to receive payment for Shares validly tendered and accepted for payment pursuant to the Offer. 3. Procedure for Tendering Shares. Valid Tender. For Shares to be validly tendered pursuant to the Offer, a prop- erly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof), together with any required signature guarantees, or an Agent's Message in connection with a book-entry transfer of Shares, and any other documents required by the Letter of Transmittal, must be received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date. In addition, either (i) certificates for tendered Shares must be received by the Depositary along with the Letter of Transmittal at one of such addresses or such Shares must be tendered pursuant to the procedure for book-entry transfer set forth below (and a Book-Entry Con- firmation received by the Depositary), in each case prior to the Expiration Date, or (ii) the tendering shareholder must comply with the guaranteed deliv- ery procedure set forth below. The method of delivery of certificates representing shares, the Letter of Transmittal and all other required documents, including delivery through any Book-Entry Transfer Facility, is at the election and risk of the tendering shareholder. Shares will be deemed delivered only when actually received by the Depositary. If delivery is by mail, registered mail with return receipt re- quested, properly insured, is recommended. In all cases, sufficient time should be allowed to ensure timely delivery. Book-Entry Transfer. The Depositary will establish an account with respect to the Shares at each Book-Entry Transfer Facility for purposes of the Offer within two business days after the date of this Offer to Purchase. Any finan- cial institution that is a participant in any of the Book-Entry Transfer Facil- ities' systems may make book-entry delivery of Shares by causing a Book-Entry Transfer Facility to transfer such Shares into the Depositary's account at a Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures for such transfer. However, although delivery of Shares may be effected through book-entry at a Book-Entry Transfer Facility, a prop- erly completed and duly executed Letter of Transmittal (or manually signed fac- simile thereof) with any required signature guarantees or an Agent's Message in connection with a book-entry delivery of Shares, and any other documents re- quired by the Letter of Transmittal, must, in any case, be transmitted to, and received by, the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date, or the tendering share- holder must comply with the guaranteed delivery procedure described below. De- livery of documents to a Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures does not constitute delivery to the Depositary. 5 Signature Guarantees. No signature guarantee is required on the Letter of Transmittal if (i) the Letter of Transmittal is signed by the registered holder of Shares (which term, for purposes of this Section, includes any par- ticipant in any of the Book-Entry Transfer Facilities whose name appears on a security position listing as the owner of the Shares) tendered therewith and such registered holder has not completed either the box entitled "Special De- livery Instructions" or the box entitled "Special Payment Instructions" on the Letter of Transmittal or (ii) such Shares are tendered for the account of a bank, broker, dealer, credit union, savings association or other entity that is a member in good standing of a recognized Medallion Program approved by The Securities Transfer Association, Inc. (an "Eligible Institution"). In all other cases, all signatures on the Letter of Transmittal must be guaranteed by an Eligible Institution. See Instructions 1 and 5 to the Letter of Transmit- tal. If the certificates for Shares are registered in the name of a person other than the signer of the Letter of Transmittal, or if payment is to be made or certificates for Shares not tendered or not accepted for payment are to be issued to a person other than the registered holder of the certificates surrendered, the tendered certificates must be endorsed or accompanied by ap- propriate stock powers, in either case signed exactly as the name or names of the registered holders or owners appear on the certificates, with the signa- tures on the certificates or stock powers guaranteed as described above. See Instruction 5 to the Letter of Transmittal. Guaranteed Delivery. If a shareholder desires to tender Shares pursuant to the Offer and such shareholder's certificates for Shares are not immediately available or the procedure for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach the De- positary prior to the Expiration Date, such shareholder's tender may be ef- fected if all the following conditions are met: (1) such tender is made by or through an Eligible Institution; (2) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by Offeror herewith, is received by the Depositary as provided below prior to the Expiration Date; and (3) the certificates for all tendered Shares, in proper form for transfer (or a Book-Entry Confirmation with respect to such Shares), together with a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof), with any required signature guarantees and any other documents required by the Letter of Transmittal, are received by the Depositary within three NASDAQ/NMS (as hereinafter defined) trading days after the date of execution of such Notice of Guaranteed Delivery. The Notice of Guaranteed Delivery may be delivered by hand to the Depositary or transmitted by telegram, facsimile transmission or mail to the Depositary and must include a signature guarantee by an Eligible Institution in the form set forth in such Notice of Guaranteed Delivery. Notwithstanding any other provision hereof, payment for Shares accepted for payment pursuant to the Offer will in all cases be made only after timely re- ceipt by the Depositary of (i) certificates for the Shares or a Book-Entry Confirmation with respect to such Shares, (ii) a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof) with any required signature guarantees or an Agent's Message in connection with a book-entry delivery of Shares, and (iii) any other documents required by the Letter of Transmittal. Accordingly, tendering shareholders may be paid at dif- ferent times depending upon when certificates for Shares or Book-Entry Confir- mations are actually received by the Depositary. Under no circumstances will interest be paid on the purchase price of the Shares to be paid by Offeror, regardless of any extension of the Offer or any delay in making such payment. The valid tender of Shares pursuant to one of the procedures described above will constitute a binding agreement between the tendering shareholder and Offeror upon the terms and subject to the conditions to the Offer. Backup Withholding. Under the United States federal income tax backup with- holding rules, payments in connection with the Offer or the Merger may be sub- ject to "backup withholding" as discussed in Section 5. Appointment. By executing the Letter of Transmittal, the tendering share- holder will irrevocably appoint designees of Offeror as such shareholder's at- torneys-in-fact and proxies in the manner set forth in the Letter of Transmittal, each with full power of substitution, to the full extent of such shareholder's rights with respect to the Shares tendered by such shareholder and accepted for payment by Offeror and with respect to any and all other Shares or other securities or rights issued or issuable in respect of such Shares on or after August 26, 1999. All such proxies will be considered cou- pled with an interest in the tendered Shares. Such appointment will be effec- tive when, and only to the extent that, 6 Offeror accepts for payment Shares tendered by such shareholder as provided herein. Upon such acceptance for payment, all prior powers of attorney and proxies given by such shareholder with respect to such Shares or other securi- ties or rights will, without further action, be revoked and no subsequent pow- ers of attorney and proxies may be given (and, if given, will not be deemed ef- fective). The designees of Offeror will thereby be empowered to exercise all voting and other rights with respect to such Shares or other securities or rights in respect of any annual, special or adjourned meeting of the Company's shareholders, or otherwise, as they in their sole discretion deem proper. Offeror reserves the right to require that, in order for Shares to be deemed validly tendered, immediately upon Offeror's acceptance for payment of such Shares, Offeror must be able to exercise full voting and other rights with re- spect to such Shares and other securities or rights, including voting at any meeting of shareholders then scheduled. Determination of Validity. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for payment of any tender of Shares will be determined by Offeror, in its sole discretion, which determination will be final and binding. Offeror reserves the absolute right to reject any or all tenders determined by it not to be in proper form or the acceptance for payment of or payment for which may, in the opinion of Offeror's counsel, be unlawful. Offeror also reserves the absolute right, in its sole discretion, subject to the terms and conditions of the Merger Agreement, to waive any of the condi- tions to the Offer or any defect or irregularity in any tender with respect to any particular Shares, whether or not similar defects or irregularities are waived in the case of other Shares. No tender of Shares will be deemed to have been validly made until all defects or irregularities relating thereto have been cured or waived. None of Parent, Offeror, the Dealer Manager, the Deposi- tary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification. Offeror's interpretation of the terms and conditions of the Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding. 4. Withdrawal Rights. Except as otherwise provided in this Section 4, tenders of Shares are irrevoca- ble. Shares tendered pursuant to the Offer may be withdrawn pursuant to the procedures set forth below at any time prior to the Expiration Date and, unless accepted for payment and paid for by Offeror pursuant to the Offer, may also be withdrawn at any time after October 30, 1999. For a withdrawal to be effective, a written, telegraphic or facsimile transmis- sion notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase. Any such notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder of the Shares to be withdrawn, if different from the name of the person who tendered such Shares. If certificates evidencing Shares to be withdrawn have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such certificates, the tendering shareholder must also submit to the Depositary the serial numbers shown on the particular certificates evidencing the Shares to be withdrawn, and the signature on the notice of withdrawal must be guaranteed by an Eligible Institution, except in the case of Shares tendered for the account of an Eligible Institution. If Shares have been tendered pursuant to the procedure for book-entry transfer set forth in Section 3, the notice of withdrawal must also specify the name and number of the account at the applicable Book-Entry Transfer Facility to be credited with the withdrawn Shares and otherwise comply with such Book-Entry Transfer Facility's procedures. Withdrawals of tenders of Shares may not be re- scinded, and any Shares properly withdrawn will thereafter be deemed not val- idly tendered for any purposes of the Offer. However, withdrawn Shares may be retendered by again following one of the procedures described in Section 3 at any time prior to the Expiration Date. All questions as to the form and validity (including time of receipt) of no- tices of withdrawal will be determined by Offeror in its sole discretion, which determination will be final and binding. None of Offeror, Parent, the Dealer Manager, the Depositary, the Information Agent or any other person will be un- der any duty to give notification of any defects or irregularities in any no- tice of withdrawal or incur any liability for failure to give any such notifi- cation. 5. Certain Federal Income Tax Consequences. The following is a summary of certain federal income tax consequences of the Offer and the Merger to holders whose Shares are purchased pursuant to the Of- fer or whose Shares are converted into the right to receive cash in the Merger. The summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), applicable 7 current and proposed United States Treasury Regulations issued thereunder, ju- dicial authority and administrative rulings and practice, all of which are subject to change, possibly with retroactive effect, at any time and, there- fore, the following statements and conclusions could be altered or modified. The discussion does not address holders of Shares in whose hands Shares are not capital assets, nor does it address holders who received Shares as part of a hedging, "straddle," conversion or other integrated transaction, upon con- version of securities or exercise of warrants or other rights to acquire Shares or pursuant to the exercise of employee stock options or otherwise as compensation, or to holders of Shares who are in special tax situations (such as insurance companies, tax-exempt organizations, financial institutions, United States expatriates or non-U.S. persons). Furthermore, the discussion does not address the tax treatment of holders who exercise appraisal rights in the Merger, nor does it address any aspect of foreign, state or local taxation or estate and gift taxation. THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW ARE INCLUDED FOR GENERAL INFORMATIONAL PURPOSES ONLY. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH SHAREHOLDER SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR TO DETERMINE THE AP- PLICABILITY OF THE RULES DISCUSSED BELOW TO SUCH SHAREHOLDER AND THE PARTICU- LAR TAX EFFECTS OF THE OFFER AND THE MERGER, INCLUDING THE APPLICATION AND EF- FECT OF STATE, LOCAL AND OTHER INCOME TAX LAWS. The receipt of cash for Shares pursuant to the Offer or the Merger will be a taxable transaction for federal income tax purposes under the Code (and also may be a taxable transaction under applicable state, local, foreign and other income tax laws). In general, for federal income tax purposes, a holder of Shares will recognize gain or loss in an amount equal to the difference be- tween its adjusted tax basis in the Shares sold pursuant to the Offer or con- verted into the right to receive cash in the Merger and the amount of cash re- ceived therefor. Gain or loss must be determined separately for each block of Shares (i.e., Shares acquired at the same cost in a single transaction) sold pursuant to the Offer or converted to cash in the Merger. Such gain or loss will be capital gain or loss and will be long-term gain or loss if, on the date of sale (or, if applicable, the date of the Merger), the Shares were held for more than one year. Under the United States federal income tax backup withholding rules, payments in connection with the Offer or the Merger may be subject to "backup withhold- ing" at a rate of 31%. In order to avoid backup withholding, each tendering shareholder, unless an exemption applies, must provide the Depositary with such shareholder's correct taxpayer identification number and certify that such shareholder is not subject to such backup withholding by completing the Substitute Form W-9 included in the Letter of Transmittal. Backup withholding is not an additional tax but merely an advance payment, which may be refunded to the extent it results in an overpayment of tax. Certain persons generally are entitled to exemption from backup withholding, including corporations, fi- nancial institutions and certain foreign individuals. Each shareholder should consult with such holder's own tax advisor as to such holder's qualification for exemption from backup withholding and the procedure for obtaining such ex- emption. All shareholders surrendering Shares pursuant to the Offer should complete and sign the main signature form and the Substitute Form W-9 included as part of the Letter of Transmittal to provide the information and certification neces- sary to avoid backup withholding (unless an applicable exemption exists and is proved in a manner satisfactory to Offeror and the Depositary). Noncorporate foreign shareholders should complete and sign the main signature form and a Form W-8, Certificate of Foreign Status, a copy of which may be obtained from the Depositary, in order to avoid backup withholding. See Instruction 9 to the Letter of Transmittal. 8 6. Price Range of Shares. The Shares are included for trading on the National Association of Securities Dealers Automated Quotation National Market System ("NASDAQ/NMS") under the trading symbol "REIN". The Company has never paid cash dividends on the Shares. The following table sets forth, for the periods indicated, the high and low sale price per Share on the NASDAQ/NMS for the applicable periods.
--------------- High Low ------- ------- 1997 First Quarter $ 8 3/4 $ 6 3/4 Second Quarter 16 1/2 6 1/4 Third Quarter 30 1/2 15 Fourth Quarter 31 1/2 23 1998 First Quarter $31 $22 Second Quarter 35 18 11/16 Third Quarter 21 5/8 7 Fourth Quarter 9 3/4 6 1999 First Quarter $13 3/4 $ 6 5/8 Second Quarter 17 3/8 9 1/4 Third Quarter (through August 31, 1999) 35 1/4 15 5/8
On August 25, 1999, the last full trading day before the public announcement of the execution of the Merger Agreement, the closing sales price per Share as re- ported on the NASDAQ/NMS was $17 5/8. On August 31, 1999, the last full trading day before the commencement of the Offer, the closing sales price per Share as reported on the NASDAQ/NMS was $34 13/16 per Share. Shareholders are urged to obtain current market quotations for the Shares. 7. Effect of the Offer on the Market for Shares; Stock Quotation; Exchange Act Registration and Margin Securities. The purchase of Shares pursuant to the Offer will reduce the number of holders of Shares and the number of Shares that might otherwise trade publicly and could adversely affect the liquidity and market value of the remaining Shares, if any, held by the public. The Shares are currently listed and traded on the NASDAQ/NMS, which constitutes the principal trading market for the Shares. Depending upon the number of shares purchased pursuant to the Offer, the Shares may no longer meet the re- quirements of the NASD for continued inclusion on the NASDAQ/NMS, which re- quires that an issuer have (i) at least 500,000 publicly held shares, held by at least 300 round lot shareholders, with a market value of at least $1.0 mil- lion, at least 2 registered and active market makers, and a minimum bid price of $1 and (ii) (A) net tangible assets of $2.0 million, (B) market capitaliza- tion of $35.0 million or (C) net income of $500,000 in the most recently com- pleted fiscal year or in two of the last three most recently completed fiscal years. If the NASDAQ/NMS were to cease to publish quotations for the Shares, it is possible that the Shares would continue to trade in the over-the-counter market and that price or other quotations would be reported by other sources. The extent of the public market for such Shares and the availability of such quotations would depend, however, upon such factors as the number of sharehold- ers and/or the aggregate market value of the Shares remaining at such time, the interest in maintaining a market in the Shares on the part of securities firms, the possible termination of registration under the Exchange Act as described below, and other factors. Parent cannot predict whether the reduction in the number of Shares that might otherwise trade publicly would have an adverse or beneficial effect on the market price for, or marketability of, the Shares or whether it would cause future market prices to be greater or lesser than the Offer Price. The Shares are currently registered under the Exchange Act. Registration of the Shares under the Exchange Act may be terminated upon application of the Company to the Commission if the Shares are neither listed on a national securities ex- change nor held by 300 or more holders of record. Termination of registration of the Shares under the Exchange Act would substantially reduce the information required to be furnished by the Company to its shareholders 9 and to the Commission and would make certain provisions of the Exchange Act no longer applicable to the Company, such as the short-swing profit recovery pro- visions of Section 16(b) of the Exchange Act, the requirement of furnishing a proxy statement pursuant to Section 14(a) of the Exchange Act in connection with shareholders' meetings and the related requirement of furnishing an annual report to shareholders, and the requirements of Rule 13e-3 under the Exchange Act with respect to "going private" transactions. Furthermore, the ability of "affiliates" of the Company and persons holding "restricted securities" of the Company to dispose of such securities pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended (the "Securities Act"), may be impaired or eliminated. Parent intends to seek delisting of the Shares from the NASDAQ/NMS and to cause the Company to apply for termination of registration of the Shares under the Exchange Act as soon after the completion of the Offer as the requirements for such delisting and termination are met. If registration of the Shares is not terminated prior to the Merger, then the Shares will cease to be reported on the NASDAQ/NMS and the registration of the Shares under the Exchange Act will be terminated following the consummation of the Merger. The Shares are currently "margin securities" under the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which has the effect, among other things, of allowing brokers to extend credit on the collateral of the Shares. Depending upon factors similar to those described above regarding listing and market quotations, it is possible that following the Offer the Shares would no longer constitute "margin securities" for the purposes of the margin regulations of the Federal Reserve Board and therefore could no longer be used as collateral for loans made by brokers. 8. Certain Information Concerning the Company. Except as specifically set forth herein, the historical information concerning the Company contained in this Offer to Purchase, including financial informa- tion, has been taken from or based upon publicly available documents and rec- ords on file with the Commission and other public sources. None of Parent, Offeror, the Dealer Manager, the Information Agent or the Depositary assumes any responsibility for the accuracy or completeness of the information concern- ing the Company contained in such documents and records or for any failure by the Company to disclose events which may have occurred or may affect the sig- nificance or accuracy of any such information to Parent or Offeror. The Company is a Minnesota corporation with its principal place of business lo- cated at 9300 North 75th Avenue, Minneapolis, Minnesota 55428. According to the Company Form 10-K for the year ended January 3, 1999, the Company designs, manufactures and markets proprietary small-scale drinking water systems under the PUR(R) brand name for the household, recreational and military markets. These products include a line of self-monitoring water filters for household use, a rugged line of portable drinking water systems for outdoor enthusiasts and international travelers and a line of low-energy, reverse osmosis desalinators for offshore marine, commercial life raft and military use. Set forth below is certain selected historical consolidated financial informa- tion with respect to the Company and its subsidiaries excerpted or derived from the audited consolidated financial statements included in the Company Form 10-K for the year ended January 3, 1999 and from the unaudited consolidated finan- cial statements included in the Company's Quarterly Report on Form 10-Q for the quarter ended July 4, 1999. More comprehensive financial information is in- cluded in such reports and other documents filed by the Company with the Com- mission, and the following summary is qualified in its entirety by reference to such reports and such other documents and all the financial information (in- cluding any related notes) contained therein. The reports and other documents filed with the Commission should be available for inspection and copies thereof should be obtainable in the manner set forth below under "Available Informa- tion." 10 Recovery Engineering, Inc. Selected Historical Financial Data
------------------------------------------------------------------ Year Ended ------------------------------------------------------------------ December 31, December 31, December 31, December 31, January 3, 1994 1995 1996 1997 1999 ------------ ------------ ------------ ------------ ---------- (In thousands, except per share data) Statement of Operations Data: Net sales............... $16,671 $22,921 $ 33,277 $71,243 $ 76,965 Cost of products sold... 7,897 13,959 20,756 37,417 40,218 ------------ ------------ ------------ ------------ ---------- Gross profit............ 8,774 8,962 12,521 33,826 36,747 Operating expenses: Selling, general and administrative........ 5,240 14,692 21,803 32,815 41,657 Research and development........... 1,064 2,021 2,007 3,082 4,186 Facility relocation costs................. -- -- 973 -- -- Equipment disposal costs................. -- -- -- -- 554 ------------ ------------ ------------ ------------ ---------- 6,304 16,713 24,783 35,897 46,397 ------------ ------------ ------------ ------------ ---------- Income (loss) from operations............. 2,470 (7,751) (12,262) (2,071) (9,650) Other income (expense): Interest income and other................. 508 551 220 43 598 Interest expense and other................. (52) (126) (457) (1,427) (1,536) ------------ ------------ ------------ ------------ ---------- Loss before income taxes.................. 2,926 (7,326) (12,499) (3,455) (10,588) Income tax expense (benefit).............. 907 (2,564) -- -- -- ------------ ------------ ------------ ------------ ---------- Net income (loss)....... $ 2,019 $(4,762) $(12,499) $(3,455) $(10,588) ============ ============ ============ ============ ========== Net income (loss) per share (basic) (1)...... $ 0.57 $ (1.12) $ (2.90) $ (0.77) $ (1.92) ============ ============ ============ ============ ========== Weighted average shares (basic)................ 3,531 4,239 4,307 4,471 5,510 Net income (loss) per share (diluted) (1).... $ 0.50 $ (1.12) $ (2.90) $ (0.77) $ (1.92) ============ ============ ============ ============ ========== Weighted average shares (diluted).............. 4,029 4,239 4,307 4,471 5,510 Balance Sheet Data (at end of period): Working capital......... $14,754 $10,051 $ 9,743 $ 2,575 $ 28,065 Total assets............ 25,054 23,622 33,257 42,269 59,876 Long-term debt.......... -- -- 15,000 15,000 15,000 Shareholders' equity.... 22,895 19,430 7,131 4,231 32,271
(1) All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to FASB Statement 128 requirements. 11
-------------------------- Six Months Ended -------------------------- July 5, 1998 July 4, 1999 ------------ ------------ (Unaudited) (Unaudited) (In thousands, except per share data) Statement of Operations Data: Net sales........................................... $38,949 $45,158 Cost of products sold............................... 19,659 21,239 ------------ ------------ Gross profit........................................ 19,290 23,919 Operating expenses: Selling, general and administrative............... 16,722 19,832 Research and development.......................... 2,100 1,923 ------------ ------------ 18,822 21,755 ------------ ------------ Income (loss) from operations....................... 468 2,164 Other income (expense): Interest income and other......................... 207 453 Interest expense and other........................ (934) (507) ------------ ------------ Loss before income taxes............................ (259) 2,110 Income tax expense (benefit)........................ (40) 317 ------------ ------------ Net income (loss)................................... $ (219) $ 1,793 ============ ============ Net income (loss) per share (basic) (1)............. $ (0.04) $ 0.30 ============ ============ Weighted average shares (basic)..................... 5,044 6,023 Net income (loss) per share (diluted) (1)........... $ (0.04) $ 0.29 ============ ============ Weighted average shares (diluted)................... 5,044 7,234 Balance Sheet Data (at end of period): Working capital..................................... $38,447 $30,486 Total assets........................................ 67,927 63,532 Long term debt...................................... 15,000 15,000 Shareholders' equity................................ 42,451 34,329
(1) All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to FASB Statement 128 requirements. Certain Company Projections To the knowledge of Parent and Offeror, the Company does not as a matter of course make public forecasts as to its future financial performance. However, in connection with the preliminary discussions concerning the feasibility of the Offer and the Merger, the Company furnished Parent with certain financial projections. The projections set forth below (the "Projections") are derived or excerpted from information provided by the Company and are based on numerous assumptions concerning future events. The Projections have not been adjusted to reflect the effects of the Offer or the Merger. The Projections should be read together with the other information contained in this Section 8. Year Ending December 31 (in millions of dollars)
1999 2000 2001 2002 2003 ----- ------ ------ ------ ------ Total Sales................................... $93.2 $124.8 $164.4 $206.8 $242.7 Gross Profit.................................. $54.9 $ 68.7 $ 95.7 $127.0 $154.2 EBITDA*....................................... $11.1 $ 20.0 $ 34.6 $ 54.0 $ 70.1 EBIT**........................................ $ 7.2 $ 15.6 $ 29.8 $ 48.7 $ 64.4 Net Income.................................... $ 5.9 $ 10.6 $ 20.2 $ 33.2 $ 44.4
- -------- * EBITDA means earnings before interest, taxes, depreciation and amortization. ** EBIT means earnings before interest and taxes. 12 The Projections were not prepared with a view to public disclosure or compli- ance with published guidelines of the Commission or the guidelines established by the American Institute of Certified Public Accountants regarding projec- tions or forecasts and are included herein only because such information was provided to Parent. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Projections. The Projections reflect numerous assumptions (not all of which were stated in the Projections and not all of which were provided to Parent), all made by management of the Company, with respect to industry per- formance, general business, economic, market and financial conditions and other matters, all of which are difficult to predict, many of which are beyond the Company's control and none of which were subject to approval by Parent or Offeror. Accordingly, there can be no assurance that the assumptions made in preparing the Projections will prove accurate, and actual results may be mate- rially greater or less than those contained in the Projections. The inclusion of the Projections herein should not be regarded as an indication that any of Parent or Offeror or their respective representatives considered or consider the Projections to be a reliable prediction of future events, and the Projec- tions should not be relied upon as such. None of Parent or Offeror and their respective representatives assumes any responsibility for the validity, rea- sonableness, accuracy or completeness of the Projections. None of Parent or Offeror and any of their representatives has made, or makes, any representa- tion to any person regarding the information contained in the Projections and none of them intends to update or otherwise revise the Projections to reflect circumstances existing after the date when made or to reflect the occurrence of future events even in the event that any or all of the assumptions under- lying the Projections are shown to be in error. Available Information The Company is subject to the reporting requirements of the Exchange Act and, in accordance therewith, is required to file reports and other information with the Commission relating to its business, financial condition and other matters. Information as of particular dates concerning the Company's directors and officers, their remuneration, options granted to them, the principal hold- ers of the Company's securities and any material interests of such persons in transactions with the Company is required to be disclosed in proxy statements distributed to the Company's shareholders and filed with the Commission. Such reports, proxy statements and other information should be available for in- spection at the public reference facilities of the Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies should be obtainable, by mail, upon payment of the Commission's customary charges, by writing to the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy statements and other informa- tion regarding registrants that file electronically with the Commission. 9. Certain Information Concerning Parent and Offeror. Parent manufactures and markets a broad range of consumer products in many countries throughout the world. The Company's products fall into five business segments: Laundry and Cleaning, Paper, Beauty Care, Food and Beverage, and Health Care. Parent has approximately 110,000 employees worldwide. For the year ended June 30, 1999, Parent had sales of approximately $38.1 billion, and net earnings of approximately $3.8 billion. Parent's shareholders' equity at June 30, 1999 was approximately $12.1 billion. Parent's principal executive offices are located at One Procter & Gamble Plaza, Cincinnati, Ohio 45202- 3315. Parent is subject to the reporting requirements of the Exchange Act and, in accordance therewith, is required to file reports and other information with the Commission relating to its business, financial condition and other matters. Information as of particular dates concerning Parent's directors and officers, their remuneration, options granted to them, the principal holders of Parent's securities and any material interests of such persons in transac- tions with Parent is required to be disclosed in proxy statements distributed to Parent's shareholders and filed with the Commission. Such reports and other documents should be available for inspection and copies should be attainable from the offices of the Commission in the same manner as set forth under "Available Information" in Section 8 above. Offeror is a Minnesota corporation, newly formed by Parent in connection with the Offer and the transactions contemplated thereby. The offices of Offeror are located at One Procter & Gamble Plaza, Cincinnati, Ohio 45202-3315. Parent directly owns all the outstanding capital stock of Offeror. It is not antici- pated that, prior to the consummation of the Offer and the Merger, Offeror will have any significant assets or liabilities or will engage in any activi- ties other than those incident to the Offer and the Merger. 13 For certain information concerning the directors and executive officers of Par- ent and Offeror, see Schedule I to this Offer to Purchase. Except as set forth in this Offer to Purchase: (i) none of Parent nor Offeror nor, to the best knowledge of any of the foregoing, any of the persons listed in Schedule I to this Offer to Purchase or any associate or majority owned sub- sidiary of any of the foregoing beneficially owns or has a right to acquire any Shares or any other equity securities of the Company; (ii) none of Parent nor Offeror nor, to the best knowledge of any of the foregoing, any of the persons or entities referred to in clause (i) above or any of their executive officers, directors, or subsidiaries has effected any transaction in the Shares or any other equity securities of the Company during the past 60 days; (iii) none of Parent nor Offeror nor, to the best knowledge of any of the foregoing, any of the persons listed in Schedule I to this Offer to Purchase has any contract, arrangement, understanding or relationship with any other person with respect to any securities of the Company, including but not limited to, contracts, ar- rangements, understandings or relationships concerning the transfer or voting thereof, joint ventures, loan or option arrangements, puts or calls, guaranties of loans, guaranties against loss or the giving or withholding of proxies, con- sents or authorizations; (iv) since January 1, 1996, there have been no trans- actions or business relationships which would be required to be disclosed under the rules and regulations of the Commission between any of Parent, Offeror or any of their respective subsidiaries or, to the best knowledge of any of Parent or Offeror, any of the persons listed in Schedule I to this Offer to Purchase, on the one hand, and the Company or any of its executive officers, directors or affiliates, on the other hand; and (v) since January 1, 1996, there have been no contacts, negotiations or transactions between any of Parent, Offeror or any of their respective subsidiaries or, to the best knowledge of any of Parent, Offeror or any of the persons listed in Schedule I to this Offer to Purchase, on the one hand, and the Company or its subsidiaries or affiliates, on the other hand, concerning a merger, consolidation or acquisition, tender offer or other acquisition of securities, an election of directors or a sale or other transfer of a material amount of assets of the Company or any of its subsidiar- ies. None of Parent or Offeror had any relationship with the Company prior to the commencement of the discussions which led to the execution of the Merger Agree- ment. See Section 11. Each of Parent and Offeror disclaims that it is an "af- filiate" of the Company within the meaning of Rule 13e-3 under the Exchange Act. 10. Source and Amount of Funds. The total amount of funds required to purchase the Shares, to cancel the Op- tions, Warrants and Convertible Notes and to pay Parent's related fees and ex- penses is expected to be approximately $283 million. Amounts necessary to pay for the Shares which are tendered in the Offer will be obtained by Offeror from Parent which in turn would obtain such funds from Parent's existing working capital. 11. Background of the Offer. In February 1999, Brian F. Sullivan, Chairman and Chief Executive Officer of the Company, was approached concerning the possibility of a strategic alliance or business combination with another consumer products company ("Potential Buyer A"). In response, Mr. Sullivan met with representatives of Potential Buy- er A at its offices to conduct a high level business review of the Company. The parties executed a confidentiality agreement on February 18, 1999, and thereaf- ter exchanged information during the period from February 1999 to April 1999. On April 29, 1999, at a meeting of the Board of Directors, Mr. Sullivan pro- vided information concerning his discussions with Potential Buyer A and dis- cussed strategic alternatives available to the Company. The Board and certain members of senior management analyzed a number of industry trends and condi- tions, as well as issues specific to the Company. The Board of Directors autho- rized management to explore strategic alternatives available to the Company and to engage an investment banking firm. The Board reviewed the qualifications of a number of investment banking firms, including Goldman Sachs. As part of such review, the Board noted that Goldman Sachs Group, L.P., has an investment in the Company in the form of the Convertible Notes; that Robert R. Gheewalla, a Vice President of Goldman Sachs, is a director of the Company; and that Goldman Sachs provides investment banking services to a number of companies that might have an interest in effecting a possible business combination or other strate- gic alliance with the Company. The Board determined that such relationships did not prevent Goldman Sachs from fully and fairly representing the interests of the Company and did not impair the ability of the Board to rely on the advice and opinions of Goldman Sachs. The Company then met with Goldman Sachs and another investment banking firm. On May 14, 1999, after considering the relative qualifications of the two firms, the Company engaged Goldman Sachs as the Company's 14 exclusive financial advisor for the purpose of advising the Company in connection with a possible sale of all or a portion of the Company. The Company requested Goldman Sachs to identify the companies that might be most likely to be interested in effecting a possible business combination or other strategic alliance with the Company. On June 1, 1999, the Board of Directors held a telephonic conference at which Mr. Sullivan reported on the Company's operations, including its expectations regarding operating results for the quarter ending July 4, 1999, as well as the status of the activities of Goldman Sachs and the projected schedule for con- tacting potential acquirers. The Board authorized Mr. Sullivan to direct Goldman Sachs to approach several companies concerning their possible interest in a business combination or other strategic alliance with the Company. During the period from mid-June 1999 to August 20, 1999, Goldman Sachs con- ducted a structured process to solicit interest in an acquisition of all or part of the Company from potential acquirers, provide interested parties with confidential information to assist them in evaluating the Company, and obtain definitive proposals. From mid-June to July 26, 1999, Goldman Sachs contacted a number of potential acquirers and provided confidential information to those companies which expressed an interest in a possible transaction and which signed confidentiality agreements with the Company. Those that received such information were invited to provide preliminary written indications of interest by July 26, 1999. In June 1999, Parent was contacted by representatives of Goldman Sachs to de- termine Parent's interest in a potential transaction with the Company. Subse- quent to this discussion, Goldman Sachs, on behalf of the Company, signed the Confidentiality Agreement with Parent (which was subsequently amended) and pro- vided Parent with confidential information on the Company. On June 30, 1999, the Board of Directors held a telephonic conference at which Mr. Sullivan reported on the status of Goldman Sachs' activities on be- half of the Company. On July 2, 1999, Mr. Sullivan met with representatives of Parent at the of- fices of Parent and presented an overview of the Company. The discussions in- cluded product strategy and development, and historical and projected financial results. On July 13, 1999, Mr. Sullivan met with other senior executives of Parent at the offices of Parent. The discussions included strategy, management, market trends, sales and marketing, product development, and historical and projected financial results. On July 15, 1999, Goldman Sachs contacted an additional consumer products company ("Potential Buyer B") to determine its interest in a potential transac- tion with the Company. This party expressed interest, and was asked by Goldman Sachs to provide certain information concerning such party to enable the Com- pany and Goldman Sachs to evaluate a possible transaction between such party and the Company. On July 20, 1999, Parent retained J.P. Morgan Securities Inc. ("J.P. Morgan") to act as its financial advisor with respect to a potential transaction with the Company. On July 21, 1999, the Board of Directors held a telephonic meeting at which Mr. Sullivan reported on the status of the Company's operations, including its results of operations for the quarter ended July 4, 1999. Mr. Sullivan also re- ported on the responses that had been received by Goldman Sachs at that date. On July 22, 1999, Mr. Sullivan met with senior executives of Potential Buyer A. Discussions included the same topics discussed at the July 13, 1999 meeting with Parent. On July 26, 1999, the Company received initial non-binding indications of in- terest from Parent and Potential Buyer A. On August 2, 1999, a third consumer products company ("Potential Buyer C") provided the Company with its initial non-binding indication of interest. Shortly thereafter, Robins, Kaplan, Miller & Ciresi L.L.P., as counsel to the Company, distributed to each of the inter- ested parties a proposed form of merger agreement and identified August 20, 1999 as the date for submission of definitive proposals. During the period from August 3, 1999 through August 12, 1999, Parent, Potential Buyer A and Potential Buyer C and their respective legal and financial advisors met in Minneapolis, Minnesota, with senior management of the Company and representatives of Goldman Sachs for the purpose of conducting an in-depth business and operations 15 review of the Company. During such meetings, the Company provided to each in- terested party certain confidential information regarding the Company. There- after, the Company provided the interested parties with supplemental informa- tion requested by them. On August 20, 1999, Parent delivered to Goldman Sachs a letter indicating, among other things, its interest in acquiring the Company at a price of $33.75 per Share in cash, subject to negotiation of definitive documentation and pro- vided that Parent was able to reach satisfactory arrangements with the Company's senior management regarding their continuing role in the Company following the transaction. Parent also delivered to Goldman Sachs a revision of the draft merger agreement that had been proposed by the Company. On August 20, 1999, the Company and Goldman Sachs also received communica- tions from Potential Buyer A. This party indicated it was expecting to submit a bid, but requested a substantial extension of time to conduct additional due diligence. The Company and Goldman Sachs promptly provided additional informa- tion requested by this party, but advised that the party's interest would be considered only if the Company timely received a written proposal accompanied by a proposed form of merger agreement. On August 20, 1999, Potential Buyer C decided not to submit a proposal to acquire the Company after being informed by Goldman Sachs that its bid would not be competitive unless this party increased its price significantly from that stated in its preliminary indication of interest. On August 20, 1999, the Board of Directors held a telephonic meeting to re- view Parent's proposal and the status of discussions with the other interested parties. The Board established a special committee of disinterested directors, composed of all directors other than Mr. Sullivan, to consider and take action with respect to the proposal from Parent and any proposals that might be re- ceived from other parties. The special committee directed Mr. Sullivan to ne- gotiate with and obtain additional information from Parent with respect to its proposal and to continue to communicate with Potential Buyer A. The special committee also requested that Goldman Sachs undertake a study to enable it to render an opinion as to the fairness, from a financial point of view, of the financial consideration to be received by the Company's shareholders under Parent's proposal or under any proposal received from other interested par- ties. On August 21, 1999, Parent and J.P. Morgan held a conference call with Goldman Sachs during which they discussed Parent's proposal to acquire the Company. In that conversation, Goldman Sachs indicated that Parent would in- crease its chances of acquiring the Company if Parent increased the amount it was willing to pay for the Shares. On August 22, 1999, J.P. Morgan and Goldman Sachs had several conversations during which they discussed Parent's proposal. Later on August 22, Parent advised Goldman Sachs that Parent was willing to discuss a transaction that delivered $35.25 per Share in cash to the Company's shareholders, subject to negotiation of definitive documentation and provided that Parent was able to reach satisfactory arrangements with the Company's se- nior management regarding their continuing role in the Company following the transaction. From August 23, 1999 through August 25, 1999, the Company, Parent and their respective legal and financial advisors participated in numerous conferences in Minneapolis, Minnesota, during which the terms of the Merger Agreement, the Tender and Option Agreement, the Stock Option Agreement and ancillary docu- ments, and the manner in which the transaction would be effected, were re- viewed, discussed and negotiated extensively. During the period from August 20, 1999 through August 25, 1999, Goldman Sachs continued communicating with Potential Buyer A. This party indicated an interest at a price in a range equal to or higher than the price proposed by Parent, but continued to ask for additional time for further due diligence de- spite the fact that discussions with this party began in February 1999. Al- though the Company believed that it had provided all interested parties ade- quate time to conduct due diligence, Potential Buyer A declined to comply with the timetable established by the Company and Goldman Sachs for submitting a written proposal accompanied by a proposed form of merger agreement. In view of the months of discussions with this party, its failure to comply with the timetable applicable to all parties and its requests for additional due dili- gence, the Company and Goldman Sachs concluded that Potential Buyer A was not likely to come forward with a competitive and definitive proposal. 16 On August 23, 1999, Goldman Sachs received the information it had requested from Potential Buyer B. After reviewing such information, the Company and Goldman Sachs decided not to continue discussions with such party. On August 25, 1999, the Board of Directors held a telephonic meeting to re- view the status of the transaction. At this meeting, Mr. Sullivan provided a report to the Board concerning the communications with Parent and with other interested parties during the previous five days. Mr. Sullivan and the Company's legal and financial advisors then described in detail for the Board the overall terms of the transaction and the results of the negotiations of the Merger Agreement, the Tender and Option Agreement and the Ancillary Docu- ments. The Board discussed these matters at length, as well as the potential risks and benefits of the transaction and related issues. The Board noted that Goldman Sachs Group, L.P. has an investment in the Company in the form of the Convertible Notes; that Robert R. Gheewalla, a Vice President of Goldman Sachs, is a director of the Company; and that Goldman Sachs has provided and continues to provide certain investment banking services to Parent and may continue to do so in the future, but the Board determined that such relation- ships did not impair its ability to rely on the opinion which had been re- quested from Goldman Sachs. Goldman Sachs then presented to the Board its oral opinion (which was subsequently confirmed in writing) that as of such date, based on and subject to the various factors considered, assumptions made and scope of review undertaken that was described to the Board of Directors at the meeting, the $35.25 per Share in cash to be received by the holders of Shares in the Offer and Merger is fair from a financial point of view to such hold- ers. After extensive discussion, and after considering the advice of counsel and the opinion from Goldman Sachs, the special committee of the Board, con- sisting of all of the independent directors of the Board in accordance with Section 302A.673 of the Minnesota Law, unanimously approved the Offer, the Merger and the Merger Agreement. Immediately thereafter, the Board unanimously approved the Offer, the Merger and the Merger Agreement and determined that the terms of the Offer and the Merger are in the best interests of the Company and its shareholders. At the direction of the Board, management and the Company's legal advisors worked with Parent and its management and counsel to finalize the documentation. The Merger Agreement, the Stock Option Agreement, the Tender and Option Agreement and ancillary documents were executed and de- livered during the morning of August 26, 1999. On August 26, 1999, Goldman Sachs Group L.P. approved the terms of the Merger Agreement and agreed to the cancellation of the Convertible Notes in exchange for a cash payment at the Effective Time equal to $35.25 times the number of Shares that would be issua- ble to the holders of the Convertible Notes upon conversion of the Convertible Notes, based on the Merger Consideration (i.e. one Share for each $14.85 prin- cipal amount of Convertible Notes). On August 26, 1999, Parent and the Company issued a joint press release announcing the execution of the Merger Agreement. 12. Purpose of the Offer and the Merger; Plans for the Company; The Transaction Documents. Purpose of the Offer and the Merger The purpose of the Offer is to enable Parent to acquire control of, and the entire equity interest in, the Company. The purpose of the Merger is to ac- quire all outstanding Shares not purchased pursuant to the Offer. Following the completion of the Offer, Parent intends to acquire any remaining Shares not then owned by it by consummating the Merger. In the Merger, each outstand- ing Share (other than Shares held by the Company, Parent or any of their re- spective subsidiaries and other than Shares held by Excluded Shareholders), will be converted into and become exchangeable for the right to receive the Merger Consideration, without interest less any required withholding of taxes, upon the surrender of certificates formerly representing such Shares, and the Company will become a direct wholly owned subsidiary of Parent. The acquisition of the entire interest in the Company is structured as a cash tender offer followed by a merger in order to expedite the opportunity for Parent to obtain a controlling interest in the Company. Under the Minnesota Law and the Company's articles of incorporation, the affirmative vote of the holders of a majority of the outstanding Shares is required to approve the Merger. If the Minimum Condition is satisfied, Parent would have sufficient voting power to approve the Merger without the affirmative vote of any other shareholder of the Company. Plans for the Company Following the Offer and the Merger, Parent intends to operate the Company on a basis generally consistent with the Company's existing plans and programs. If and to the extent that Parent acquires control of the Company, Parent intends to conduct a detailed review of the Company and its assets, corporate struc- ture, capitalization, operations, properties, policies, management and person- nel and consider and determine what, if any, changes would be desirable in light of the circumstances which then exist. Such strategies could include, among other things and subject to the 17 terms of the Merger Agreement, changes in the Company's business, corporate structure, articles of incorporation, bylaws, capitalization, management or dividend policy. Except as noted in this Offer to Purchase, Parent and Offeror have no present plans or proposals that would result in an extraordinary corporate transaction, such as a merger, reorganization, liquidation, or sale or transfer of a mate- rial amount of assets, involving the Company or any subsidiary of the Company or any other material changes in the Company's capitalization, dividend policy, corporate structure, business or composition of its management or Board of Di- rectors. The Merger Agreement The following is a summary of the material terms of the Merger Agreement. This summary is not a complete description of the terms and conditions thereof and is qualified in its entirety by reference to the full text thereof, which is incorporated herein by reference and a copy of which has been filed with the Commission as an exhibit to the Schedule 14D-1. The Merger Agreement may be ex- amined, and copies thereof may be obtained, as set forth in Section 8. The Offer. The Merger Agreement provides for the commencement of the Offer, in connection with which Parent and Offeror have expressly reserved the right to waive certain conditions to the Offer, but without the prior written consent of the Company, Offeror has agreed not to (i) waive the Minimum Condition, (ii) reduce the number of Shares subject to the Offer, (iii) reduce the Merger Con- sideration, (iv) extend the Offer if all of the Offer conditions are satisfied or waived, (v) change the form of consideration payable in the Offer or (vi) amend or modify any term or condition of the Offer in any manner adverse to the holders of Shares. Notwithstanding the foregoing, Offeror may, in its reason- able discretion without the consent of the Company, extend the Offer at any time and from time to time (A) if on the scheduled Expiration Date of the Offer any of the conditions to the Offer shall not have been satisfied or waived, (B) for any period required by any statute or rule, regulation, interpretation or position of the Commission or its staff applicable to the Offer, (C) for any period required by applicable law in connection with an increase in the consid- eration to be paid pursuant to the Offer, and (D) if all Offer conditions are satisfied or waived but the number of Shares tendered is more than 80%, but less than 90%, of the then outstanding number of Shares, for an aggregate pe- riod of not more than 10 business days (for all such extensions under this clause (D)) beyond the latest expiration date that would be permitted under clause (A), (B) or (C) of this sentence. In addition, the Merger Agreement pro- vides that if any condition to the Offer is not satisfied at the Expiration Date but is reasonably capable of being satisfied within three business days thereof, Offeror shall, and Parent shall cause Offeror to, extend the Offer for three business days and Parent and the Company shall each use reasonable ef- forts to cause such condition to become satisfied during such three business day period. Consideration to be Paid in the Merger. The Merger Agreement provides that sub- ject to the terms and conditions set forth in the Merger Agreement and the ap- plicable provisions of the Minnesota Law, Offeror shall be merged with and into the Company and the separate existence of Offeror will cease, and the Company shall be the surviving corporation in the Merger (the "Surviving Corporation") and shall be a wholly owned subsidiary of Parent. In the Merger, each share of common stock, $.01 par value per share, of Offeror issued and outstanding imme- diately prior to the time of filing of a certificate of merger relating to the Merger with the Secretary of State of the State of Minnesota, or such later time as may be set forth therein (the "Effective Time"), shall continue to re- main outstanding and shall constitute one share of common stock of the Surviv- ing Corporation. At the Effective Time, each outstanding Share (other than Shares owned by Parent or any direct or indirect subsidiary of Parent or the Excluded Shareholders or shares owned by the Company or any direct or indirect subsidiary of the Company), shall, by virtue of the Merger and without any ac- tion on the part of the holder thereof, be converted into the right to receive the Merger Consideration, without interest. The Merger Agreement provides that (subject to the provisions of the Merger Agreement and the applicable provi- sions of the Minnesota Law) the closing of the Merger shall occur on a date to be specified by the parties, which shall be no later than two business days af- ter the satisfaction or waiver of the conditions to closing set forth in Arti- cle VIII of the Merger Agreement, unless another date or place is agreed to in writing by the parties thereto. Treatment of Stock Options and Warrants. The Merger Agreement provides that at the Effective Time, each outstanding option to purchase Shares under the Com- pany Option Plans (individually an "Option" and collectively, "Options"), whether or not then exercisable, and all warrants to acquire Shares (individu- ally, a "Warrant" and collectively, "Warrants") outstanding immediately prior to the Effective Time, whether or not then exercisable, shall (by all appropri- ate and necessary action taken prior to the date of the Merger Agreement of the Board of Directors of the Company or such committee or committees of the Board as are vested with authority to administer the Company Option Plans) be 18 cancelled. Each holder of an Option or Warrant (other than Excluded Options) shall be entitled to receive for each Share subject to an Option or Warrant an amount in cash equal to the excess, if any, of the Merger Consideration over the per share exercise price of such Option or Warrant, without interest. "Ex- cluded Options" are the options of holders set forth in Section 3.1(d) of the Company Disclosure Letter to the Merger Agreement which such holders have agreed will be cancelled without payment at the Effective Time. All amounts payable in respect of Options and Warrants shall be subject to all applicable withholding of taxes. The Company has agreed to use its reasonable efforts to obtain all necessary consents, if any, of the holders of Options or Warrants to the cancellation of the Options or Warrants. Treatment of Convertible Notes. The Merger Agreement provides that the Convert- ible Notes outstanding immediately prior to the Effective Time shall be can- celled and the holders of the Convertible Notes shall be entitled to receive an amount in cash equal to (i) the Merger Consideration times (ii) the number of Shares that would be issuable to such holders upon conversion of the Convert- ible Notes, based on the Merger Consideration (i.e., one Share for each $14.85 principal amount of the Convertible Notes). No consideration or other value shall be paid to the holders of the Convertible Notes in respect of the reset rights granted to the holders of the Convertible Notes pursuant to Section 9.6(j) of the Securities Purchase Agreement, dated as of July 19, 1996, as amended, between the Company and the other parties thereto. At the Effective Time, such reset rights will be cancelled and shall expire. The amounts payable in respect of the Convertible Notes shall be subject to all applicable with- holding of taxes. The Company has obtained the consent of the holders of Con- vertible Notes to the cancellation of the Convertible Notes. Company ESPP. The Merger Agreement provides that prior to any public announce- ment that it has entered into the Merger Agreement, the Company shall have taken all corporate action necessary to amend the Company ESPP such that, fol- lowing the amendment of the ESPP, (i) no person shall commence to participate therein, (ii) no participant shall be permitted to increase the amount of pay- roll deductions in respect thereof, (iii) the "Stock Purchase Date" (as defined in the Company ESPP) to occur on or first following amendment of the ESPP (whichever is earlier) shall be the final date on which Common Stock is pur- chased thereunder, and (iv) the Company ESPP shall be terminated effective on the Effective Date. Promptly following such Stock Purchase Date, any payroll deductions not applied to the purchase of Shares shall be remitted to partici- pants. Board Representation. The Merger Agreement provides that, promptly upon the purchase of Shares pursuant to the Offer, and from time to time thereafter, Parent shall be entitled to designate such number of directors as will give Parent representation on the Board of Directors of the Company equal to the product of (i) the total number of directors then on the Board of Directors of the Company and (ii) the percentage that the number of Shares purchased by Offeror or Parent bears to the number of Shares then outstanding, rounded up to the next whole number, and the Company shall, upon request by Parent, promptly increase the size of the Board of Directors and/or exercise its reasonable ef- forts to secure the resignations of such number of directors as is necessary to enable Parent's designees to be so elected. At the request of Parent, the Com- pany will use its reasonable efforts to cause such individuals designated by Parent to constitute the same percentage of (i) each committee of the Board of Directors, (ii) the board of directors of Recovery Engineering International, Ltd. ("REI Barbados"), and (iii) the committees of the board of directors of REI Barbados. The Company's obligations to appoint designees to the Board of Directors are subject to Section 14(f) of the Exchange Act. Notwithstanding anything stated in the Merger Agreement, if Shares are purchased pursuant to the Offer, Parent and Offeror shall use reasonable efforts to assure until that the Effective Time, the Board of Directors of the Company has at least one di- rector who is a director on the date of the Merger Agreement and is not an em- ployee of the Company. The Merger Agreement also provides that following the election or appointment of Parent's designees and prior to the Effective Time, the approval of a major- ity of the directors of the Company then in office who are not designated by Parent shall be required to authorize (i) any amendment to the Company's arti- cles of incorporation or by laws, (ii) any termination of the Merger Agreement by the Company, (iii) any amendment of the Merger Agreement requiring action by the Board of Directors, (iv) any extension of time for the performance of the obligations or other acts of Parent or Offeror and (v) any waiver of compliance with any of the agreements or conditions contained in the Merger Agreement for the benefit of the Company. Shareholder Meeting. The Merger Agreement provides that, if required by appli- cable law, the Company, acting through the Board of Directors, shall (i) call a meeting of its shareholders (the "Shareholder Meeting") for the purpose of vot- ing upon the Merger, (ii) hold the Shareholder Meeting as soon as practicable following the termination or expiration of the Offer or the purchase of Shares pursuant to the Offer, (iii) submit the Merger Agreement and the transactions contemplated thereby for approval of the Company's shareholders at the Share- holder Meeting and (iv) 19 recommend to its shareholders the approval of the Merger Agreement and the transactions contemplated thereby, unless it has received a written opinion from outside counsel that such recommendation would violate the Board of Direc- tors' fiduciary duty under applicable law. At the Shareholder Meeting, Parent and Offeror shall cause all Shares then owned by them to be voted in favor of approval and adoption of the Merger. The Merger Agreement provides that, not- withstanding the foregoing, if Offeror or any other subsidiary of Parent shall acquire at least 90% of the outstanding Shares, the parties thereto shall take all necessary and appropriate action to cause the Merger to become effective as soon as practicable after the expiration of the Offer without a shareholders meeting in accordance with Section 302A.621 of the Minnesota Law. Representations and Warranties. The Merger Agreement contains various repre- sentations and warranties of the parties thereto. These include representations and warranties by the Company with respect to (i) the due organization, exist- ence, qualification, good standing, corporate power and authority of the Com- pany and REI Barbados; (ii) the capital structure of the Company and REI Barba- dos; (iii) the due authorization, execution, delivery and performance of the Merger Agreement, the Stock Option Agreement, and the documents contemplated thereby (the Stock Option Agreement and such other documents, collectively, the "Ancillary Documents") and the consummation of transactions contemplated there- by, and the validity and enforceability thereof; (iv) required filings, con- sents and approvals and the absence of any violations, breaches or defaults which would result from performance by the Company of the Merger Agreement and the Ancillary Documents; (v) the accuracy of reports filed by the Company with the Commission (including financial statements) since January 1, 1996; (vi) the absence of certain changes or events; (vii) the absence of any material litiga- tion; (viii) the absence of any undisclosed material liabilities; (ix) certain employee benefit matters; (x) compliance with applicable laws, licenses and permits and the absence of any default or violation with respect to material contracts; (xi) antitakeover statutes; (xii) environmental matters relating to the Company and REI Barbados; (xiii) the opinion of the Financial Advisor; (xiv) certain tax matters; (xv) compliance with the Company's articles of in- corporation and bylaws; (xvi) certain intellectual property matters; (xvii) ti- tle to assets; (xviii) year 2000 compliance; (xix) insurance; (xx) the Rights Agreement; (xxi) the absence of brokers or finders other than the Financial Ad- visor; (xxii) the accuracy of the Schedule 14D-9, if any, filed by the Company; (xxiii) labor and employment matters; (xxiv) the validity and enforceability of material contracts; (xxv) the possession by the Company and REI Barbados of necessary licenses, permits, certificates of need, approvals and authoriza- tions; and (xxvi) shareholder approvals. Parent and Offeror have also made certain representations and warranties, in- cluding with respect to (i) the due organization, existence, good standing and corporate power and authority of Parent and Offeror; (ii) the due authoriza- tion, execution, delivery and performance of the Merger Agreement, the Ancil- lary Documents and the Tender and Option Agreement and the consummation of transactions contemplated thereby, and the validity and enforceability thereof; (iii) required filings, consents and approvals and the absence of any viola- tions, breaches or defaults which would result from performance by Parent or Offeror of the Merger Agreement, the Ancillary Documents and the Tender and Op- tion Agreement; (iv) compliance by Parent and Offeror with their respective certificates or articles of incorporation and bylaws; (v) the accuracy of in- formation provided by Parent or Offeror in the Schedule 14D-1 and the other documents pursuant to which the Offer is being made; (vi) approval by the Board of Directors of Parent of the Merger Agreement, the Merger and the other trans- actions contemplated thereby; (vii) shareholder approvals; (viii) the lack of any contracts, agreements or arrangements that would trigger Section 302A.673 of the Minnesota Law; (ix) the activities of Offeror and its lack of subsidiar- ies; and (x) the sufficiency of funds available to Parent and Offeror for the consummation of the Offer and the Merger. Conduct of Interim Operations. The Company has agreed that from the date of the Merger Agreement to the Effective Time, with certain exceptions, unless Parent has consented in writing thereto, the Company shall, and shall cause REI Barba- dos to, conduct its operations and business, in all material respects, in the ordinary and usual course of business and consistent with past practice, and use its reasonable efforts to preserve intact its business organizations' good- will, maintain in effect all existing material qualifications, licenses, per- mits, approvals and authorizations, substantially comply with all applicable laws, keep available the services of its present executive officers and key em- ployees, and preserve the goodwill and business relationships with suppliers, distributors, customers and others having business relationships with it. In addition, the Company has agreed, from the date of the Merger Agreement to the Effective Time, with certain exceptions, that it will not, and will cause REI Barbados not to: (i) except to the extent required by law or the rules and regulations of NASDAQ/NMS, amend or otherwise change its articles of incorpora- tion or bylaws; (ii) with certain exceptions, issue, authorize, sell, pledge or dispose of, grant or otherwise create any additional shares of, or any Options to acquire any shares of, its capital stock or any debt or equity securities convertible into or exchangeable for 20 such capital stock or accelerate any right to convert or exchange or acquire any of its securities for any such shares or ownership interest, or take any action to cause to be exercisable any otherwise unexercisable Option granted under any Company Option Plan; (iii) purchase, redeem or otherwise acquire or retire any shares of its capital stock or any long-term debt; (iv) declare, set aside, make or pay any dividend or other distribution payable in cash, stock, property or otherwise, with respect to any of its capital stock, or subdivide, reclassify, recapitalize, split, combine or exchange any of its shares of capi- tal stock or otherwise change its capitalization as it exists on the date of the Merger Agreement; (v) incur or become contingently liable with respect to any indebtedness for borrowed money or the deferred purchase price for property or services or pursuant to any capital lease or other financing or guarantee any such indebtedness or issue any debt securities; (vi) (a) except as may be required by applicable laws or the Merger Agreement, increase the compensation payable or to become payable to, or enter into any employment agreement with its executive officers or employees, except in the ordinary course of business consistent with past practice; (b) grant any severance or termination pay to any director, executive officer or employee of the Company or REI Barbados, ex- cept pursuant to existing benefit plans of the Company; (c) enter into any sev- erance agreement with any director, executive officer or employee or (d) except as required by applicable laws, establish, adopt, enter into, terminate, with- draw from or amend in any material respect or take action to accelerate or waive any rights or benefits under any plan, program or arrangement of the Com- pany; (vii) take any action, other than reasonable actions in the ordinary course of business consistent with past practice, with respect to accounting policies or procedures, except as may be required by generally accepted ac- counting principles, make any material tax election, settle any material tax liability or audit or, except as required by law, amend in any material respect any material tax return; (viii) acquire by merger, purchase or otherwise an eq- uity interest in or a portion of the assets of any business or any business en- tity; (ix) mortgage or otherwise encumber or subject to any lien, or sell, transfer or otherwise dispose of, any of its properties or assets, other than certain transactions in the ordinary course of business and consistent with past practice; (x) settle or compromise any material pending or threatened lit- igation; (xi) make any advance, loan, extension of credit or capital contribu- tion to, or purchase or acquire (by merger or otherwise) any stock, bonds, notes, debentures or other securities of, or any assets constituting a business unit of, or make any other investment in, any person, firm or entity, with cer- tain exceptions; (xii) make any capital expenditures in the aggregate for the Company and REI Barbados in excess of the amounts specified in the Company's budget for capital expenditures; (xiii) waive, amend or allow to lapse any term or condition of any confidentiality or "standstill" agreement to which the Com- pany is a party; (xiv) (a) enter into any contracts with distributors or sales agents other than contracts terminable without penalty on less than 30 days' notice, (b) enter into any contracts to distribute products for others or which restrict the ability of the Company, REI Barbados or the Company's affiliates to compete or (c) enter into any other contracts that would constitute Material Contracts (as defined in the Merger Agreement); or (d) amend any of the forego- ing agreements as they exist on the date hereof; (xv) amend or waive the Rights Agreement, or redeem the Rights, except in connection with the transactions contemplated under the Merger Agreement or the Ancillary Documents; (xvi) ef- fect any material change in the Company's advertising, product promotion or brand support policies or programs or commit to any significant new product promotion or advertising campaign; (xvii) effect any material change in the Company's billing practices or sales terms, or cause or permit a material ac- celeration or delay in the manufacture, shipment or sale of inventory, the col- lection of accounts or notes receivable or the payment of accounts or notes payable; (xviii) enter into any contracts for derivatives; (xix) waive, relin- quish, release or terminate any right or claim, including any such right or claim under any Material Contract, except in the ordinary course of business consistent with the customary past practice of the Company, or permit any rights of material value to use any intellectual property to lapse or be for- feited; (xx) take any action to cause the Common Stock to be delisted from the NASDAQ/NMS prior to the completion of the Offer; (xxi) take any action that would reasonably be expected to render Parent's and Offeror's representations and warranties under the Merger Agreement to be untrue or result in Parent or Offeror being unable to perform their respective obligations or comply with their respective covenants under the Merger Agreement; or (xxii) agree in writ- ing or otherwise to take any of the foregoing actions. Access to Information. Under the Merger Agreement, from the date of the Merger Agreement to the Effective Time, the Company and REI Barbados have agreed to (i) afford to the officers, employees, auditors, agents and advisors of Parent full access at all reasonable times to all of its officers, employees, agents, properties, offices, plants and other facilities, books, records and tax re- turns, (ii) furnish promptly to Parent all financial, operating and other data and information as may be reasonably requested, and (iii) permit Parent to make such copies of documents and such inspections and investigations, including, without limitation, such environmental assessments and testing as Parent may request. Such information shall be held in confidence to the extent required by, and in accordance with, the provisions of the Confidentiality Agreement, dated as of June 24, 1999, as amended, between the Financial Advisor on behalf of the Company and Parent (the "Confidentiality Agreement"), which shall remain in full force and effect. 21 No Solicitation. The Company has agreed in the Merger Agreement that the Com- pany shall not, and shall not permit REI Barbados or any officer or director to, and shall use its best efforts to cause the employees, agents or other au- thorized representatives of the Company and REI Barbados not to, directly or indirectly, (i) initiate, solicit or knowingly encourage, facilitate or assist (including by furnishing any information or providing any access to the proper- ties, books or records of the Company) any inquiries or proposals that consti- tute, or could reasonably be expected to lead to, a proposal or offer for a merger, consolidation, business combination, sale of assets representing a ma- terial portion of the assets of the Company and REI Barbados, taken as a whole, sale of shares of capital stock representing, individually or in the aggregate, 10% or more of the voting power of the Company, including, without limitation, by way of a tender offer or exchange offer for shares of capital stock repre- senting 10% or more of the voting power of the Company (any of the foregoing proposals or inquiries being referred to hereinafter as an "Acquisition Propos- al"), (ii) engage in negotiations concerning, or provide any information or data relating to the Company or REI Barbados for the purposes of making any Ac- quisition Proposal, (iii) agree to, approve or recommend any Acquisition Pro- posal or (iv) take any other action inconsistent with the obligations and com- mitments assumed by the Company pursuant to the "No Solicitation" provisions of the Merger Agreement. Nothing in the Merger Agreement, however, shall prevent the Company or its Board of Directors from (A) furnishing nonpublic information to, entering into customary confidentiality agreements with, or entering into discussions with, any person or entity in connection with an unsolicited bona fide written Acquisition Proposal to the Company or its shareholders if the Company provides Parent with at least two business days' notice of its intent to do so and the Acquisition Proposal is made in writing prior to Offeror and/or Parent having purchased any Shares under the Offer, and the Board of Di- rectors, by action of a majority of the entire Board of Directors, determines in good faith that such Acquisition Proposal constitutes, or is reasonably likely to constitute, a Superior Proposal or (B) taking and disclosing to its shareholders a position with respect to such Acquisition Proposal or making any other public disclosure that, in the written opinion of the Company's counsel, is required by applicable law; provided, however, that the Board of Directors will not recommend that the shareholders of the Company tender their Shares into any tender offer unless (i) the Board of Directors determines that such tender offer constitutes a Superior Proposal and (ii) the Company has provided Parent and Offeror with not less than two business days' prior notice of its intent to do so. For purposes of the Merger Agreement, "Superior Proposal" means a bona fide written Acquisition Proposal which (A) (i) was not solicited, encouraged or knowingly facilitated in violation of the Merger Agreement, (ii) was received in writing by the Company prior to Offeror and/or Parent having purchased any Shares under the Offer and (iii) a majority of the members of the Board of Di- rectors determines in their good faith judgment (after consultation with inde- pendent financial advisors) to be more favorable from a financial point of view to the Company and its shareholders than the Merger after giving effect to any increase in the Merger Consideration, and (B) is reasonably capable of being completed, taking into account all legal, financial, regulatory and other as- pects of such proposal; provided, however, that an Acquisition Proposal shall not constitute a Superior Proposal if the Acquisition Proposal is subject to a financing condition, unless the Board of Directors, by action of a majority of the entire Board of Directors in good faith, based on the advice of the Finan- cial Advisor or another nationally recognized investment banking firm, deter- mines that the Acquisition Proposal is readily financeable. The Company has also agreed to immediately cease and terminate any existing ac- tivities, discussions or negotiations by the Company or any of its authorized representatives conducted heretofore with respect to any of the foregoing, take the necessary steps to inform such parties of the obligations undertaken in the "No Solicitation" provisions of the Merger Agreement, and request that such parties promptly return all documents (and all copies thereof) furnished to them by the Company or its authorized representatives in connection with such activities, discussions and negotiations. The Company shall also (i) promptly notify Parent in writing after receipt by it or its authorized representatives of any Acquisition Proposal or any inquiries indicating that any person is con- sidering making an Acquisition Proposal, and provide a copy of such Acquisition Proposal or, in connection with any non-written inquiry or Acquisition Propos- al, a written statement setting forth in detail a description of the inquiry or the terms and conditions of the Acquisition Proposal, (ii) promptly notify Par- ent in writing after receipt of any request for nonpublic information relating to it or REI Barbados or for access to its or REI Barbados' properties, books or records by any person that, to the knowledge of the Company's executive of- ficers, may be considering making an Acquisition Proposal and (iii) promptly keep Parent advised of the status of any such Acquisition Proposal, indication or request. Fees and Expenses. Except as otherwise provided in the Merger Agreement, whether or not the Offer is consummated, all costs and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby 22 shall be paid by the party incurring such expenses, except that the expenses incurred in connection with printing certain of the documents to be filed with the Commission shall be paid in equal shares by the Company and Parent. The Merger Agreement provides that, under certain circumstances, the Company shall pay to Parent a fee equal to $11.865 million (the "Termination Fee"). The Company is obligated to pay the Termination Fee under the following cir- cumstances: (i) the Company terminates the Merger Agreement because, prior to Offeror and/or Parent having purchased any Shares under the Offer, the Board of Directors shall have concurrently approved, and the Company shall have con- currently entered into, a definitive agreement providing for the implementa- tion of a Superior Proposal; (ii) Parent terminates the Merger Agreement be- cause the Board of Directors has modified or amended its recommendation of the Offer or the Merger in any manner adverse to Parent or Offeror or has with- drawn or failed to confirm within five business days of Parent's request therefor its recommendation of the Offer or the Merger or has recommended ac- ceptance of any Acquisition Proposal or has resolved to do any of the forego- ing; and (iii) Parent terminates the Merger Agreement upon the termination or expiration of the Offer because the Minimum Condition shall not have been sat- isfied and (x) at the time of such termination an Acquisition Proposal is out- standing and (y) during the term of the Merger Agreement or within 12 months after the termination of the Merger Agreement, the Board of Directors recom- mends an Acquisition Proposal or the Company enters into an agreement provid- ing for an Acquisition Proposal or a transaction contemplated by an Acquisi- tion Proposal occurs. Other Agreements. The Merger Agreement provides that, subject to the terms and conditions provided in the Merger Agreement, each of the Company, Parent and Offeror shall (i) make promptly its respective filings, and any other required submissions, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), with respect to the transactions contemplated by the Merger Agreement, and (ii) use reasonable efforts to take or cause to be taken all appropriate action, and do or cause to be done all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated thereby, including using reason- able best efforts to obtain all licenses, permits, consents, approvals, autho- rizations, qualifications and orders of governmental entities, and obtain all consents and approvals from parties to contracts with the Company and Parent and their respective subsidiaries as are necessary for the transactions con- templated thereby; provided, however, that Parent shall not be required by any provision of the Merger Agreement to take any action, including entering into any consent decree that requires the divestiture of a material amount of as- sets of Parent or any of its subsidiaries. Each of Parent and the Company shall, subject to Parent's direction, use all its reasonable efforts to con- test any proceeding seeking a preliminary injunction or other legal impediment to, and to resolve any objections as may be asserted by any governmental en- tity with respect to, the Offer and/or the Merger under the HSR Act or any other antitrust laws. If, at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of the Merger Agreement, the proper officers and directors of each party to the Merger Agreement shall use their reasonable efforts to take all such action. The Merger Agreement also contains agreements on (i) notification of certain matters, (ii) the restructuring of the Merger, (iii) the Shareholder Meeting, (iv) the preparation of a proxy statement and its compliance with the federal securities laws, (v) public announcements with respect to the Merger Agreement or any of the transactions contemplated thereby and (vi) the Confidentiality Agreement. Conditions to the Merger. The Merger Agreement provides that the respective obligation of each party to effect the Merger is subject to the satisfaction or waiver of each of the following conditions: (i) if the approval of the Merger Agreement and the Merger by the holders of Shares is required by appli- cable law, the Merger Agreement shall have been approved by holders of the Shares in accordance with the Minnesota Law and the Company's articles of in- corporation and bylaws; (ii) any waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated; and (iii) none of the parties to the Merger Agreement shall be subject to any or- der or injunction of a court of competent jurisdiction which prohibits the consummation of the transactions contemplated by the Merger Agreement. The obligations of the Company to effect the Merger are subject to the satis- faction of the following conditions, unless waived by the Company: (a) the representations and warranties of Parent and Offeror contained in the Merger Agreement that are qualified as to materiality shall be true and correct in all material respects, in each case at and as of the Effective Time with the same force and effect as though made at and as of the Effective Time (except and to the extent a representation or warranty speaks specifically as of an earlier date or except as contemplated by the Merger Agreement), (b) Parent and Offeror have performed, in all material respects, all obligations and com- plied, in all material respects, with all covenants required by the Merger Agreement to be performed or complied with by it prior to the 23 Effective Time and (c) Parent shall have delivered to the Company a certifi- cate, dated the Effective Time and signed by an executive officer of Parent, evidencing compliance with clauses (a) and (b). The obligations of Parent and Offeror to effect the Merger are subject to the satisfaction of the following conditions, unless waived by Parent and Offeror: (a) the representations and warranties of the Company contained in the Merger Agreement that are qualified as to materiality shall be true and correct, and those not so qualified shall be true and correct in all material respects, in each case at and as of the Effective Time with the same force and effect as though made at and as of the Effective Time (except and to the extent a repre- sentation or warranty speaks specifically as of an earlier date or except as contemplated by the Merger Agreement), (b) the Company has performed, in all material respects, all obligations and complied, in all material respects, with all covenants required by the Merger Agreement to be performed or complied with by them prior to the Effective Time, (c) the Company shall have delivered to Parent a certificate, dated the Effective Time and signed by an executive offi- cer of the Company, evidencing compliance with clauses (a) and (b), and (d) Offeror and/or Parent shall have accepted for payment and paid for all of the Shares tendered pursuant to the Offer. Termination. The Merger Agreement, notwithstanding approval thereof by the shareholders of the Company, may be terminated at any time prior to the Effec- tive Time: (a) by mutual written consent of the Company and Parent; (b) by Parent or the Company: if (i) the Effective Time shall not have oc- curred on or before 180 days from the date of the Merger Agreement; provid- ed, however, that the right to terminate the Merger Agreement pursuant to clause (i) shall not be available to any party whose failure to fulfill any obligation under the Merger Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date; (ii) any governmental entity, the consent of which is a condition to the obliga- tions of the Company and Parent to consummate the transactions contemplated by the Merger Agreement, shall have determined not to grant its consent and all appeals of such determination shall have been taken and have been un- successful; (iii) any court of competent jurisdiction shall have issued an order, judgment or decree restraining, enjoining or otherwise prohibiting the Merger and such order, judgment or decree shall have become final and nonappealable; or (iv) upon a vote at a duly held meeting or upon an ad- journment thereof, the shareholders of the Company shall have failed to ap- prove the Merger or give any requisite approval in connection therewith; (c) by the Company, if prior to Offeror and/or Parent having purchased any Shares under the Offer, the Board of Directors shall concurrently approve, and the Company shall concurrently enter into, a definitive agreement pro- viding for the implementation of a Superior Proposal; and (d) by Parent, (i) upon the termination or expiration of the Offer without the purchase of any Common Stock thereunder if the Minimum Condition shall not have been satisfied; (ii) the failure of any condition specified in Section 14 below prior to Offeror and/or Parent having purchased any shares of Common Stock under the Offer, regardless of whether the Offer is made, which failure either continues through, or cannot in Parent's reasonable judgment be cured prior to, the date the Offer is scheduled to expire (if the Offer has been commenced) or, if the Offer has not commenced, would be scheduled to expire if it were commenced on the business day after the date of the Merger Agreement; provided, however, that the right to terminate the Merger Agreement pursuant to this clause is not available to Parent if Par- ent's failure to fulfill any obligation under the Merger Agreement has been the cause of or resulted in the failure of any such condition; or (iii) the Board of Directors shall have modified or amended its recommendation of the Offer or the Merger in any manner adverse to Parent or Offeror or shall have withdrawn or failed to confirm within five business days of Parent's request therefor its recommendation of the Offer or the Merger or shall have recommended acceptance of any Acquisition Proposal or shall have re- solved to do any of the foregoing. Indemnification; Directors' and Officers' Insurance. The Merger Agreement pro- vides that from and after the Effective Time, Parent and the Surviving Corpora- tion shall indemnify, defend and hold harmless each individual and every person who is or was a director or officer of the Company (the "Indemnified Parties"), against any expenses, judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement of (provided that such settlement has been ap- proved by Parent, such approval not to be unreasonably withheld), or otherwise incurred in connection with any claim, action, suit, proceeding, inquiry or in- vestigation (a "Claim"), based in whole or in part on the fact that such person is or was a director, officer, employee or agent of the Company and arising out of actions or omissions occurring 24 at or prior to the Effective Time (including the transactions contemplated thereby), in each case to the full extent permitted under the Minnesota Law and the Company's articles of incorporation and bylaws as in effect on the date of the Merger Agreement. Parent and the Surviving Corporation shall also advance expenses as incurred to the fullest extent permitted under applicable law, pro- vided the person to whom expenses are advanced provides an undertaking to repay such advances required under the Minnesota Law. For a period of six years after the Effective Time (or in the event any Claim is asserted within such six year period, until final disposition of that Claim), Parent shall cause the Surviving Corporation to keep in effect provi- sions in its articles of incorporation and bylaws providing for exculpation of director liability, advancement of expenses and indemnification of Indemnified Parties to the fullest extent permitted under the Minnesota Law, and such pro- visions shall not be amended except as required by applicable law or except to make changes permitted by law that would enlarge the right of indemnification of the Indemnified Parties. The Merger Agreement also provides that for a period of six years after the Ef- fective Time, Parent shall cause the Surviving Corporation to maintain in ef- fect the current policies of directors' and officers' liability insurance main- tained by the Company covering persons who are currently covered by the Company's directors' and officers' liability insurance policies with respect to actions or omissions occurring at or prior to the Effective Time to the extent that such policies are available; provided, however, that policies of at lest the same coverage containing terms and conditions no less advantageous to the insured may be substituted therefor, and the Surviving Corporation shall not be required to expend amounts in excess of 150% of the current annual premiums for the twelve-month period ending November 15, 1999 (the "Maximum Premium"). In the event the annual premium payable for such insurance coverage exceeds the Maximum Premium, Parent shall be obligated to obtain and maintain in effect a policy with the greatest amount of coverage available for a cost not exceeding the Maximum Premium. Certain Employee Matters. The Merger Agreement provides that during the period commencing at the Effective Time and ending on the second anniversary thereof, the employees of the Company and REI Barbados will continue to be provided with benefits in the aggregate that are (A) substantially equivalent to the benefits provided under Company benefit plans in effect on the date of the Merger Agree- ment or (B) if equal to or greater than the benefits described in clause (A) above, the benefits provided under benefit plans maintained by Parent for em- ployees of Parent and Parent's subsidiaries (other than the Surviving Corpora- tion and its subsidiaries). All vacation, holiday, sickness and personal days accrued by the employees of the Company and REI Barbados shall be honored. In addition, for a period of at least two years after the Effective Time (or for such longer or shorter period as is permitted or required by applicable stat- ute), Parent has agreed that it will cause the Surviving Corporation to provide for the benefit of individuals who, immediately prior to the Effective Time, are former employees of the Company and REI Barbados with benefits that are substantially equivalent, in the aggregate, to the benefits that are provided to them immediately prior to the Effective Time under Company benefit plans. In the event that any employee of the Surviving Corporation or one of its sub- sidiaries is at any time after the Effective Time transferred to Parent or any affiliate of Parent (other than the Surviving Corporation and its subsidiaries) or becomes a participant in any employee benefit plan or arrangement maintained by or contributed by Parent or any affiliate of Parent (other than the Surviv- ing Corporation and its subsidiaries), Parent will cause such plan or arrange- ment to treat the prior service of such employee with the Company and REI Bar- bados prior to the Effective Time to the extent prior service is generally rec- ognized under such plan or arrangement of the Company, as service rendered to Parent or such affiliates for purposes of eligibility, vesting or entitlement to benefits under such plan or arrangement. Parent has also agreed that it shall cause to be waived any pre-existing condition limitation under its bene- fit plans that might otherwise apply to such employee (or a former employee). Parent agrees to recognize the dollar amount of all expenses incurred by such employees (or former employees) during the calendar year in which the Effective Time occurs for purposes of satisfying the calendar year deductibles and co- payment limitations for such year under the relevant benefit plans of Parent and its subsidiaries. Parent has represented in the Merger Agreement that its current intent is to cause the Surviving Corporation to maintain its principal production facility in the Minneapolis, Minnesota metropolitan area for a period of at least two years after the Effective Time. With respect to the employees of the Company and REI Barbados set forth on Sec- tion 7.1(c) of the Company Disclosure Letter to the Merger Agreement, Parent has agreed to cause the Surviving Corporation to maintain and fund the Company's incentive bonus plan as in effect on the date of the Merger Agreement (the "Current Plan") through the 25 performance period ending December 31, 1999. For the performance period ending December 31, 1999, the portion of such bonuses that are based on the Company's operating income (the "Company Performance Component") shall not be less than 80% of the maximum amount of the Company Performance Component as described in such plan. If an employee is terminated without cause prior to December 31, 1999, such employee shall be paid such bonus in an amount prorated according to the period of such employee's service to the Company during 1999. Effective January 1, 2000, the Current Plan shall terminate, and such employees of the Company and REI Barbados shall commence to participate in Parent's incentive bonus plan (the "Parent Plan") and shall be entitled to an award from the Par- ent Plan which reflects (i) the actual period of participation of such employ- ees in the Parent Plan and (ii) the actual performance of the applicable busi- ness unit during such period. Amendment. At any time before or after approval of the Merger Agreement and the transactions contemplated thereby by the shareholders of the Company and prior to the Effective Time, Parent or the Company may amend or supplement in writing the Merger Agreement with respect to any of its terms, except that following approval by the shareholders of the Company, there shall be no amendment or supplement which by law requires further approval by such shareholders without further approval by the shareholders of the Company. Timing. The exact timing and details of the Merger will depend upon legal re- quirements and a variety of other factors, including the number of Shares ac- quired by Offeror pursuant to the Offer. Although Parent has agreed to cause the Merger to be consummated on the terms contained in the Merger Agreement, there can be no assurance as to the timing of the Merger. Stock Option Agreement The following is a summary of the material terms of the Stock Option Agreement. This summary is not a complete description of the terms and conditions thereof and is qualified in its entirety by reference to the full text thereof, which is incorporated herein by reference and a copy of which has been filed with the Commission as an exhibit to the Schedule 14D-1. Concurrently with the execution and delivery of the Merger Agreement, the Com- pany entered into the Stock Option Agreement with Parent. Pursuant to the Stock Option Agreement, the Company has granted to Parent, on the terms and subject to the conditions thereof, to grant an option to purchase up to 1,202,875 Shares. Any reference to a majority of the issued and outstanding Shares or Shares outstanding on a fully diluted basis, or similar references, for pur- poses of this Offer to Purchase, as provided in the documents described herein, excludes from the determination thereof any shares of Common Stock issuable upon the exercise of the Stock Option Agreement. Grant and Exercise of Purchase Option. Under the Stock Option Agreement, the Company granted to Parent an irrevocable option (the "Option") to purchase up to 1,202,875 Shares (the "Option Shares") at a purchase price equal to $35.25 per share (the "Purchase Price"). The Option may be exercised by Parent, in whole or in part, at any time, following (but not prior to) the occurrence of any event as a result of which Parent is entitled to receive the Termination Fee (a "Purchase Event"). The Option is subject to appropriate adjustment in the event of any change in the number of issued and outstanding shares of capi- tal stock of the Company to maintain Parent's rights under the Stock Option Agreement, including the right to purchase up to 19.9% of the capital stock of the Company entitled to vote generally for election of directors of the Company outstanding immediately prior to exercise; provided, however, that the Option will terminate upon the earliest to occur of (A) the Effective Time, (B) termi- nation of the Merger Agreement in accordance with its terms other than upon, during the continuance of, or after, a Purchase Event or an event which could lead to a Purchase Event, and (C) 120 days after the first occurrence of a Pur- chase Event. Any purchase of Option Shares upon exercise of the Option will be subject to compliance with the HSR Act and the obtaining or making of any con- sents, approvals, orders, notifications, filings, expiration of applicable waiting periods or authorizations, the failure of which to have obtained or made would have the effect of making the purchase of Option Shares by Parent illegal. In the event that Parent is entitled to and wishes to exercise the Option, it will send to the Company a written notice (an "Exercise Notice") to that effect which specifies the number of Option Shares, if any, Parent wishes to purchase, the number of Option Shares, if any, with respect to which Parent wishes to ex- ercise its Cash-Out Right (as defined below), and a date not later than 20 business days following the date such notice is given (the "Notice Date") for the closing of such purchase. Any exercise of the Option and purchase of Option Shares will be subject to compliance with applicable laws, which may prohibit the purchase of the Option Shares specified in the Exercise Notice without first 26 obtaining certain regulatory approvals. In such event, if the Option is other- wise exercisable and Parent wishes to exercise the Option, Parent may acquire the maximum number of Option Shares specified in the Exercise Notice that it is then permitted to acquire under the applicable laws, and if Parent thereafter obtains the necessary regulatory approvals to acquire the remaining balance of the Option Shares specified in the Exercise Notice, then it will be entitled to acquire the remaining balance. In the event that Parent exercised the Option and either (i) Parent receives official notice that a regulatory approval re- quired for the purchase of any Option Shares will not be issued or granted or (ii) such regulatory approval has not been issued or granted within six months of the date of the Exercise Notice, then Parent will have the right, but not the obligation, to exercise its Cash-Out Right with respect to the Option Shares for which such regulatory approval has not been issued or granted. Cash-Out Right. The Stock Option Agreement provides that if, at any time during the period commencing on a Purchase Event and ending on the termination of the Option, Parent sends to the Company an Exercise Notice indicating Parent's election to exercise a cash-out right (the "Cash-Out Right"), then the Company will pay to Parent in exchange for the cancellation of the Option with respect to such number of Option Shares as Parent specifies in the Exercise Notice, an amount in cash equal to such number of Option Shares multiplied by the differ- ence between (i) the average closing price, for the 10 NASDAQ/NMS trading days commencing on the 12th NASDAQ/NMS trading day immediately preceding the Notice Date, per share of Common Stock as reported on the NASDAQ/NMS (or, if not listed on the NASDAQ/NMS, as reported on any other national securities exchange or national securities quotation system on which the Common Stock is listed or quoted, as reported in The Wall Street Journal (Northeast edition), or, if not reported therein, any other authoritative source) and (ii) the Purchase Price. Notwithstanding the termination of the Option, Parent will be entitled to exer- cise its Cash-Out Right if it has exercised such right in accordance with the terms of the Stock Option Agreement prior to the termination of the Option. Registration Rights. The Stock Option Agreement provides that the Company will, if requested by Parent at any time within two years of the exercise of the Op- tion (a "Demand Registration"), as expeditiously as possible prepare and file up to two registration statements under the Securities Act if such registration is necessary in order to permit the sale of any Option Shares or securities that have been acquired by or are issuable to Parent upon exercise of the Op- tion in accordance with the intended method of sale or other disposition stated by Parent, including a "shelf" registration statement under Rule 415 under the Securities Act, and the Company will use its best efforts to qualify such Op- tion Shares or other securities under any applicable state securities laws. In addition, the Company will use best efforts to cause each such registration statement to become effective when requested by Parent, to obtain all consents or waivers of other parties which are required therefor, and to keep such reg- istration statement effective for such period not in excess of 180 calendar days from the day such registration statement first becomes effective as may be reasonably necessary to effect such sale or other disposition. The obligations of the Company under the Stock Option Agreement to file a registration state- ment and to maintain its effectiveness may be suspended for up to 60 consecu- tive calendar days if the Board of Directors of the Company determines in good faith that the filing of such registration statement or the maintenance of its effectiveness would be seriously detrimental to the Company; provided, however, that (i) the suspension of the Company's obligations may occur only one time in any six-month period and (ii) any requested registration so suspended will not count for purposes of requests for Demand Registrations to which Parent is en- titled. All expenses related to a registration statement prepared and filed un- der the Stock Option Agreement, and any sale covered thereby, will be at the Company's expense, except for underwriting discounts or commissions. The Stock Option Agreement also provides that if, during the time periods at which Parent is entitled to request Demand Registrations the Company effects a registration under the Securities Act of Common Stock for its own account or for any other shareholders of the Company (other than on Form S-4 or Form S-8, or any succes- sor form), it will allow Parent the right to participate in such registration, and such participation will not affect the obligation of the Company to effect Demand Registrations for Parent; provided, however, that if the managing under- writers of such offering advise the Company in writing that in their opinion the number of shares of Common Stock requested to be included in such registra- tion exceeds the number which can be sold in such offering or could materially impact the marketing or price of such offering, the Company will include the shares requested to be included therein by Parent pro rata with the shares in- tended to be included therein by the Company and any other seller of securities under such registration statement. In connection with any registration under the Stock Option Agreement, the Company and Parent will provide each other and any underwriter of the offering with customary representations, warranties, covenants, indemnification, and contribution in connection with such registra- tion. Profit Limitation. The Stock Option Agreement provides that, notwithstanding any other provision of the Stock Option Agreement, in no event will Parent's Total Profit (as defined below) plus any Termination Fee paid to Parent exceed in 27 the aggregate $11.865 million, and, if the total amount that otherwise would be received by Parent would exceed such amount, Parent, at its sole election, shall either (i) reduce the number of shares of Common Stock subject to the Op- tion, (ii) deliver to the Company for cancellation Option Shares previously purchased by Parent against the refund of the purchase price therefor, (iii) pay cash to the Company or (iv) any combination thereof, so that Parent's actu- ally realized Total Profit, when aggregated with the Termination Fee so paid to Parent, shall not exceed $11.865 million, based on the transaction value after taking into account the foregoing actions. The Stock Option Agreement further provides that the Option may not be exercised for a number of Option Shares as would, as of the date of exercise, result in a Notional Total Profit (as de- fined below) which, together with any termination fee theretofore paid to Par- ent, would exceed $11.865 million. The term "Total Profit" as used in the Stock Option Agreement means the aggre- gate amount (before taxes) of the following: (i) the amount received by Parent pursuant to Parent's exercise of the Cash-Out Right, (ii)(x) the net cash amounts or the fair market value of any property received by Parent pursuant to the sale of Option Shares (or (A) any other securities into which such Option Shares are converted or exchanged or (B) any property, cash or other securities received pursuant to the Stock Option Agreement ("Additional Property")) to any unaffiliated party, but in no case less than the fair market value of such Op- tion Shares at the time of such sale, less (y) Parent's purchase price of such Option Shares, and (iii) the net cash amounts received by Parent on the trans- fer of the Option (or any portion thereof) to any unaffiliated party. As used in the Stock Option Agreement, the term "Notional Total Profit" with respect to any number of Option Shares as to which Parent may propose to exer- cise the Option means the Total Profit determined as of the date of such pro- posal assuming for such purpose that the Option were exercised on such date for such number of Option Shares and assuming that (i) such Option Shares (or any other securities into which such Option Shares are converted or exchanged), to- gether with all other Option Shares held by Parent and its affiliates as of such date, were sold for cash at the closing market price on the NASDAQ/NMS for the Common Stock as of the close of business on the preceding trading day (less customary brokerage commissions) and (ii) the Additional Property is disposed of for fair market value. Other Agreements. The Stock Option Agreement also provides that if Common Stock or any other securities to be acquired upon exercise of the Option are then listed on the NASDAQ/NMS (or any other national securities exchange or national securities quotation system), the Company, upon the request of Parent, will promptly file an application to list the shares of Common Stock or other secu- rities to be acquired upon exercise of the Option on the NASDAQ/NMS (and any other such national securities exchange or national securities quotation sys- tem) and will use its best efforts to obtain approval of such listing as promptly as practicable. Other. Because the rights and obligations of Parent and the Company under the Stock Option Agreement are subject to compliance with the HSR Act, Parent will include in its merger notifications to be filed with the Department of Justice and Federal Trade Commission a description of its rights under the Stock Option Agreement. See Section 15. Tender and Option Agreement The following is a summary of the material terms of the Tender and Option Agreement. This summary is not a complete description of the terms and condi- tions thereof and is qualified in its entirety by reference to the full text thereof, which is incorporated herein by reference and a copy of which has been filed with the Commission as an exhibit to the Schedule 14D-1. Tender of Shares. Concurrently with the execution and delivery of the Merger Agreement, and in order to induce Parent and Offeror to enter into the Merger Agreement, the Major Shareholders who beneficially own in the aggregate, as of August 25, 1999, approximately 19.3% of the outstanding Shares (17.1% of the Shares on a fully diluted basis) have entered into a Tender and Option Agree- ment with Parent and Offeror. Pursuant to the Tender and Option Agreement, the Major Shareholders have agreed, among other things, to tender promptly the Shares held by them pursuant to the Offer, and not to withdraw any such Shares, and to various other provisions described below. Transfer of the Shares. Pursuant to the Tender and Option Agreement, each Major Shareholder has agreed, during the term of the Agreement, except as otherwise expressly provided therein, that such Major Shareholder will not (a) tender into any tender or exchange offer or otherwise sell, transfer, pledge, assign, hypothecate or otherwise dispose of (including by operation of law), or create any lien on, any of the Shares, (b) deposit the Shares into a voting trust, en- ter into a voting agreement or arrangement with respect to the Shares or grant any proxy or power of attorney with respect to the 28 Shares, (c) enter into any contract, option or other arrangement (including any profit sharing arrangement) or undertaking with respect to the direct or indi- rect acquisition or sale, transfer, pledge, assignment, hypothecation or other disposition of any interest in or the voting of any Shares or any other securi- ties of the Company, (d) exercise any rights (including under Section 302A.473 of the Minnesota Law) to demand appraisal of any Shares which may arise with respect to the Merger, or (e) take any other action that would in any way re- strict, limit or interfere with the performance of such Major Shareholder's ob- ligations thereunder or the transactions contemplated thereby or which would otherwise diminish the benefits of the Tender and Option Agreement to Parent or Offeror. Tender of Shares. The Tender and Option Agreement provides that each Major Shareholder agrees that such Major Shareholder will validly tender (or cause the record owner of such shares to validly tender) and sell (and not withdraw, except in the event the Purchase Option (as defined below) is exercised, in which case such withdrawal shall be for the limited purpose of consummating the Purchase Option) pursuant to and in accordance with the terms of the Offer not later than the fifth business day after commencement of the Offer (or the ear- lier of the expiration date of the Offer and the fifth business day after such Shares are acquired by such Major Shareholder if the Major Shareholder acquires Shares after the date thereof), or, if the Major Shareholder has not received the Offer documents by such time, within two business days following receipt of such documents, all of the then outstanding Shares beneficially owned by such Major Shareholder (including the Shares outstanding as of the date of the Ten- der and Option Agreement and Shares issued following the exercise (if any) of the Options, Warrants, and Rights, in each case as set forth on Schedule A to the Tender and Option Agreement). Upon the purchase by Parent or Offeror of all of such then outstanding Shares beneficially owned by such Major Shareholder pursuant to the Offer, the Tender and Option Agreement will terminate as it re- lates to such Major Shareholder. Voting Agreement. The Tender and Option Agreement also provides that each Major Shareholder (a) agrees to appear (or not appear, if requested by Parent or Offeror) at any annual, special, postponed or adjourned meeting of the share- holders of the Company or otherwise cause the Shares such Major Shareholder beneficially owns to be counted as present (or absent, if requested by Parent or Offeror) thereat for purposes of establishing a quorum and to vote or con- sent, and (b) constitutes and appoints Parent and Offeror, or any nominee thereof, with full power of substitution, during and for the term of the Tender and Option Agreement, as his true and lawful attorney and proxy for and in his name, place and stead, to vote all the Shares such Major Shareholder benefi- cially owns at the time of such vote, at any annual, special, postponed or ad- journed meeting of the shareholders of the Company (and this appointment will include the right to sign his or its name (as shareholder) to any consent, cer- tificate or other document relating to the Company that the laws of the State of Minnesota may require or permit), in the case of both (a) and (b) above, (x) in favor of approval and adoption of the Merger Agreement and approval and adoption of the Merger and the other transactions contemplated thereby and (y) against (1) any Acquisition Proposal (other than the Merger and the other transactions contemplated thereby), (2) any action or agreement that would re- sult in a breach in any respect of any covenant, agreement, representation or warranty of the Company under the Merger Agreement and (3) any other action that is intended, or could be expected, to impede, interfere with, delay, post- pone, or adversely affect the Offer, the Merger and the other transactions con- templated by the Tender and Option Agreement, the Merger Agreement and the An- cillary Documents. No Solicitation. The Tender and Option Agreement provides that each Major Shareholder agrees that neither such Major Shareholder nor any of such Major Shareholder's officers, directors, employees, trustees, representatives, agents or affiliates (including, without limitation, any investment banker, attorney or accountant retained by any of them) will directly or indirectly initiate, solicit or encourage (including by way of furnishing non-public information or assistance), or take any other action to facilitate, any inquiries or the mak- ing or submission of any Acquisition Proposal, or enter into or maintain or continue discussions or negotiate with any person or entity in furtherance of such inquiries or to obtain or induce any person to make or submit an Acquisi- tion Proposal or agree to or endorse any Acquisition Proposal or assist or par- ticipate in, facilitate or encourage, any effort or attempt by any other person or entity to do or seek any of the foregoing or authorize or permit any of its officers, directors, employees, trustees or any of its affiliates or any in- vestment banker, financial advisor, attorney, accountant or other representa- tive or agent retained by any of them to take any such action. Each Major Shareholder shall promptly advise Parent in writing of the receipt of any re- quest for information or any inquiries or proposals relating to an Acquisition Proposal. Grant of Purchase Option. The Tender and Option Agreement provides that each Major Shareholder grants to Parent and Offeror an irrevocable option (the "Pur- chase Option") to purchase for cash, in a manner set forth below, any or all of the Shares (and including Shares acquired after the date of the Tender and Op- tion Agreement by such Shareholder) beneficially owned by the Major Shareholder at a price per Share (the "Exercise Price") equal to the Merger Considera- 29 tion. The Exercise Price as it relates to the Options and Warrants beneficially owned by each Major Shareholder shall be an amount in cash equal to the excess, if any, of the Merger Consideration over the per share exercise price of such Option or Warrant, without interest. To the extent that the per share exercise or conversion price of any Option or Warrant exceeds the Merger Consideration, such Option or Warrant shall be canceled and the Major Shareholder shall not receive or be entitled to receive any consideration from Parent, Offeror or the Company relating thereto. The Rights associated with any Shares transferred pursuant to the Tender and Option Agreement will be transferred with such Shares without payment of any additional consideration therefor. In the event of any stock dividends, stock splits, recapitalizations, combinations, ex- changes of shares or the like, the Exercise Price will be appropriately adjust- ed. The amount payable shall be subject to all applicable withholding taxes. Exercise of Purchase Option. The Tender and Option Agreement provides that the Purchase Option may be exercised by Parent or Offeror, in whole or in part, at any time or from time to time after the occurrence of any Trigger Event. A "Trigger Event" means any one of the following: (i) the Merger Agreement be- comes terminable under circumstances that entitle Parent or Offeror to receive the Termination Fee under Section 9.3 of the Merger Agreement (regardless of whether the Merger Agreement is actually terminated and whether the Termination Fee is then actually paid) or (ii) the Offer is consummated but, due to the failure of the Major Shareholder to validly tender and not withdraw all of the then outstanding Shares beneficially owned by such Major Shareholder, Parent has not accepted for payment or paid for all of such Shares. If requested by Parent and Offeror, such Major Shareholder shall exercise and/or convert all Options and Warrants (to the extent exercisable and convertible) and other rights (including conversion or exchange rights), other than Options and War- rants with exercise or conversion prices above the Merger Consideration, bene- ficially owned by such Major Shareholder, and shall, if directed by Parent and Offeror, tender the Shares acquired pursuant to such exercise or conversion into the Offer or sell such Shares to Parent or Offeror as provided in the Ten- der and Option Agreement. Total Profit Remittance. The Tender and Option Agreement provides that in the in the event that, within 12 months of the exercise of the Purchase Option, Parent sells, to a third party which is not an affiliate of Parent, Shares ac- quired by means of exercise of the Purchase Option ("Exercise Shares") for an aggregate consideration (the "Aggregate Consideration") greater than the aggre- gate Exercise Price (the "Aggregate Exercise Price") paid for such Shares, Par- ent agrees to pay to the Major Shareholders an amount equal to the excess of the Aggregate Consideration over the Aggregate Exercise Price. Each Major Shareholder shall be entitled to the proportion of such excess equal to the proportion of the total number of Exercise Shares which were acquired from such Major Shareholder. In addition, in the event that, within 12 months of the ex- ercise of the Purchase Option, Parent shall consummate a merger agreement with the Company, or shall purchase Shares pursuant to a tender offer for all Shares, at a price per Share (taking into account any stock dividends, stock splits, recapitalizations, combinations, exchanges of shares or the like or any other action that would have the effect of changing Parent's ownership of the Company's capital stock or other securities) in excess of the Exercise Price, Parent agrees to pay each Major Shareholder such excess for each Exercise Share purchased from such Major Shareholder. Representations and Warranties. Under the Tender and Option Agreement, the Ma- jor Shareholders made customary representations and warranties to Parent and Offeror, including with respect to their authority to enter into and perform their obligations under the Tender and Option Agreement, the due execution and delivery by the Major Shareholders of the Tender and Option Agreement and their good title to all of the Shares, free and clear of all encumbrances. Each of Parent and Offeror has also made customary representations and warran- ties under the Tender and Option Agreement, including with respect to Parent's and Offeror's authority to enter into and perform its obligations under the Tender and Option Agreement and the due execution and delivery by Parent and Offeror of the Tender and Option Agreement. Termination. The Tender and Option Agreement will terminate, with respect to any Major Shareholder, upon the purchase by Parent and/or Offeror of all of the then outstanding Shares beneficially owned by such Major Shareholder pursuant to the Offer and otherwise, upon the earliest of: (i) the Effective Time; (ii) termination of the Merger Agreement in accordance with its terms other than up- on, during the continuance of, or after, a Trigger Event or an event which could lead to a Trigger Event; or (iii) 120 days following any termination of the Merger Agreement upon, during the continuance of or after a Trigger Event (or if, at the expiration of such 120 day period the Purchase Option cannot be exercised by reason of any applicable judgment, decree, order, injunction, law or regulation, ten business days after such impediment to exercise has been re- moved or has become final and not subject to appeal). 30 Consulting Agreement, Non-Competition Agreement and Letter of Understanding for Brian F. Sullivan In connection with the execution and delivery of the Merger Agreement, Parent entered into a Consulting Agreement (the "Consulting Agreement") and a Non-Com- petition Agreement (the "Non-Competition Agreement") with Brian F. Sullivan, and executed a Letter of Understanding, with the Company and Mr. Sullivan, each dated as of August 26, 1999 (collectively, the "Sullivan Agreements"). The fol- lowing is a summary of the material terms of the Sullivan Agreements. This sum- mary is not a complete description of the terms and conditions of the Sullivan Agreements and is qualified in its entirety by reference to the full text of the Sullivan Agreements, which are incorporated herein by reference and copies of which have been filed with the Commission as an exhibit to the Schedule 14D- 1. Pursuant to the Consulting Agreement, Mr. Sullivan will serve Parent as a consultant commencing with the Effective Time and ending upon the attainment of certain objectives. Mr. Sullivan will receive consulting fees of $1,000,000 in the aggregate for services rendered pursuant to the Consulting Agreement and will assign to Parent all of his proprietary rights in and to all inventions, discoveries, improvements and patentable or copyrightable works initiated, con- ceived or made by him, either alone or in conjunction with others, during the term of the Consulting Agreement and related to the business or activities of Parent and/or its subsidiaries. Mr. Sullivan's Non-Competition Agreement requires him to refrain for a period commencing upon the Effective Date and for three years thereafter from (i) so- liciting or hiring any employee of Parent or otherwise interfering with or dis- rupting the employment relationship between Parent and any employee, (ii) en- gaging in any business that is competitive with any business or line of busi- ness of the Company as it exists prior to the Effective Date in any country in the world, or (iii) interfering with or otherwise disrupting the relationship between Parent and any vendor, supplier or client. Mr. Sullivan is also perma- nently prohibited from disclosing or otherwise divulging any confidential in- formation of the Company. In consideration of such restrictions, Parent will pay to Mr. Sullivan over three years an aggregate sum of $1,942,500. In the Letter of Understanding Mr. Sullivan agreed that 35,000 of his 250,000 Options will be cancelled at the Effective Time without consideration therefor and that the Merger Consideration payable to Mr. Sullivan at the Effective Time with respect to the remaining 215,000 Options will be reduced by an amount equal to the principal and accrued interest on Mr. Sullivan's promissory note dated April 18, 1997, payable to the Company, whereupon the Company will cancel and discharge all of Mr. Sullivan's obligations thereunder. In addition, pursu- ant to the Letter of Understanding, Mr. Sullivan agreed that the Company will terminate the Change-in-Control Severance Pay Agreement between the Company and Mr. Sullivan immediately prior to the Effective Date, and Mr. Sullivan will have no rights thereunder. Non-Competition Agreement and Letter of Understanding for Reed A. Watson In connection with the execution and delivery of the Merger Agreement, Parent entered into a Non-Competition Agreement with Reed A. Watson (the "Non-Competi- tion Agreement"), and executed a Letter of Understanding, with the Company and Mr. Watson, each dated as of August 26, 1999 (collectively, the "Watson Agree- ments"). The following is a summary of the material terms of the Watson Agree- ments. This summary is not a complete description of the terms and conditions of the Watson Agreements and is qualified in its entirety by reference to the full text of the Watson Agreements, which are incorporated herein by reference and copies of which have been filed with the Commission as an exhibit to the Schedule 14D-1. Mr. Watson's Non-Competition Agreement requires him to refrain for a period commencing upon the Effective Date and for two years thereafter from (i) solic- iting or hiring any employee of Parent or otherwise interfering with or dis- rupting the employment relationship between Parent and any employee, (ii) en- gaging in any business that is competitive with any business or line of busi- ness of the Company as it exists prior to the Effective Date in any country in the world, or (iii) interfering with or otherwise disrupting the relationship between Parent and any vendor, supplier or client. Mr. Watson is also perma- nently prohibited from disclosing or otherwise divulging any confidential in- formation of the Company. In consideration of such restrictions, Parent will pay to Mr. Watson over two years an aggregate sum of $850,000. In the Letter of Understanding Mr. Watson agreed that 52,000 of his 150,000 Options will be cancelled at the Effective Time without payment. In addition, pursuant to the Letter of Understanding, Mr. Watson agreed that the Company will terminate the Change-in-Control Severance Pay Agreement between the Com- pany and Mr. Watson immediately prior to the Effective Date and Mr. Watson will have no rights thereunder. 31 13. Dividends and Distributions. Pursuant to the terms of the Merger Agreement, from and after the date of the Merger Agreement until the Effective Time, unless Parent has consented in writ- ing thereto, the Company will not, and will not permit REI Barbados to: (i) with certain exceptions, issue, authorize, sell, pledge or dispose of, grant or otherwise create any additional shares of, or any Options to acquire any shares of, its capital stock or any debt or equity securities convertible into or ex- changeable for such capital stock or accelerate any right to convert or ex- change or acquire any of its securities for any such shares or ownership inter- est, or take any action to cause to be exercisable any otherwise unexercisable Option granted under any Company Option Plan; (ii) purchase, redeem or other- wise acquire or retire any shares of its capital stock or any long-term debt; or (iii) declare, set aside or pay any dividend payable in cash, stock, prop- erty or otherwise, with respect to any of its capital stock, change its capi- talization as its exists on the date of the Merger Agreement, or subdivide, re- classify, recapitalize, split, combine or exchange any of its shares of capital stock. 14. Certain Conditions to the Offer. Notwithstanding any other provision of the Offer, and subject to the terms and conditions of the Merger Agreement, Offeror shall not be required to accept for payment or pay for, subject to any applicable rules and regulations of the Com- mission, including Rule 14e-1(c) of the Exchange Act, any Shares not thereto- fore accepted for payment or paid for and may terminate or amend the Offer as to such Shares unless (i) the Minimum Condition is satisfied and (ii) any wait- ing period under the HSR Act applicable to the purchase of Shares pursuant to the Offer shall have expired or been terminated. Furthermore, notwithstanding any other term of the Offer or the Merger Agreement, Offeror shall not be re- quired to accept for payment or, subject as aforesaid, to pay for any Shares not theretofore accepted for payment or paid for, and may terminate or amend the Offer if at any time on or after the date of the Merger Agreement and be- fore the acceptance of such Shares for payment or the payment therefor, any of the following conditions exist or shall occur and remain in effect at the scheduled expiration of the Offer: (a) there shall have been instituted or pending any litigation before any court or other governmental entity which seeks to or, if successful, would (i) challenge or restrict the acquisition by Parent or Offeror (or any of its affiliates) of Shares pursuant to the Offer or the Merger, restrain, prohibit or delay the making or consummation of the Offer or the Merger, or obtain any damages in connection therewith, (ii) make the purchase of or payment for some or all of the Shares pursuant to the Offer or the Merger illegal or otherwise restrict or prohibit consummation of the Offer or the Merger, (iii) impose limitations on the ability of Parent or Offeror (or any of their affiliates) effectively to acquire, operate or hold, or re- quire Parent, Offeror or Company or any of their respective affiliates or subsidiaries to dispose of or hold separate, any portion of the assets or the business of any one of them or their subsidiaries or affiliates, (iv) impose limitations on the ability of Parent, Offeror or their affiliates to exercise full rights of ownership of the Shares acquired by it pursuant to the Offer or the Merger, including, without limitation, the right to vote the Shares acquired by it on all matters properly presented to the share- holders of the Company, (v) restrict any future business activity by Par- ent, Offeror, the Company or any of their affiliates, including, without limitation, requiring the prior consent of any person or entity (including any governmental entity) to future transactions by Parent, Offeror, the Company or any of their affiliates, or (vi) otherwise affect Parent, Offeror, the Company or any of their respective affiliates, which, in each such case described in (i) through (vi), is reasonably likely to have a ma- terial adverse effect on the Company, Parent or Offeror or otherwise make consummation of the Offer or the Merger unduly burdensome; or (b) there shall have been promulgated, enacted, entered, enforced or deemed applicable to the Offer or the Merger, by any governmental entity, any law (other than the HSR Act) that is reasonably likely to result in any of the consequences referred to in subsection (a) above; or (c) the Merger Agreement shall have been terminated in accordance with its terms; or 32 (d) (i) any of the representations and warranties made by the Company in the Merger Agreement or in any Ancillary Document shall not have been true and correct in all respects when made, or shall thereafter have ceased to be true and correct in all respects as if made as of such later date (other than representations and warranties made as of a specified date), except where the failure of the representations and warranties to be true and cor- rect in all respects would not in the aggregate have a material adverse ef- fect on the Company, or (ii) the Company shall have breached or failed to comply in any material respect with any of its obligations under the Merger Agreement; or (e) the Board of Directors shall have modified or amended its recommenda- tion of the Offer or the Merger in any manner adverse to Parent or Offeror or shall have withdrawn or failed to confirm within five business days of Parent's request therefor its recommendation of the Offer or the Merger or shall have recommended acceptance of any Acquisition Proposal or shall have resolved to do any of the foregoing; or (f) any change, new event or development shall have occurred or be threat- ened which, either individually or in the aggregate, would or is likely to have a material adverse effect on the Company, other than changes in gen- eral economic, financial, regulatory, political or market conditions. The foregoing conditions are for the sole benefit of Parent and Offeror and may be asserted by Parent or Offeror with respect to the consummation of the Offer regardless of the circumstances giving rise to any such condition (other than any action or inaction by Parent or Offeror) and may be waived by Parent or Offeror, in whole or in part, at any time and from time to time, in the reason- able discretion of Parent subject to the terms of the Merger Agreement. The failure by Parent or Offeror at any time to exercise any of the foregoing rights will not be deemed a waiver of any right, the waiver of such right with respect to any particular facts or circumstances shall not be deemed a waiver with respect to any other facts or circumstances, and each right will be deemed an ongoing right which may be asserted at any time and from time to time. Should the Offer be terminated pursuant to the foregoing provisions, all ten- dered Shares not theretofore accepted for payment shall forthwith be returned by the Depositary to the tendering shareholders. 15. Certain Regulatory and Legal Matters. Except as described in this Section 15, based on a review of publicly available filings made by the Company with the Commission and other publicly available information concerning the Company, as well as certain representations made to Parent and Offeror in the Merger Agreement by the Company, neither Parent nor Offeror is aware of any license or regulatory permit that appears to be mate- rial to the business of the Company and REI Barbados, taken as a whole, that might be adversely affected by Offeror's acquisition of Shares as contemplated herein or of any approval or other action by any governmental entity that would be required for the acquisition or ownership of Shares by Offeror as contem- plated herein. Should any such approval or other action be required, Parent and Offeror currently contemplate that such approval or other action will be sought, except as described below under "State Takeover Laws." While, except as otherwise expressly described in this Section 15, Offeror does not presently intend to delay the acceptance for payment of, or payment for, Shares tendered pursuant to the Offer, pending the outcome of any such matter, there can be no assurance that any such approval or other action, if needed, would be obtained or would be obtained without substantial conditions or that failure to obtain any such approval or other action might not result in consequences adverse to the Company's business, or that certain parts of the Company's business might not have to be disposed of if such approvals were not obtained or such other actions were not taken or in order to obtain any such approval or other action. If certain types of adverse action are taken with respect to the matters dis- cussed below (or if any governmental approval is not obtained), Offeror could decline to accept for payment or pay for any Shares tendered. See Section 14 for certain conditions to the Offer. State Takeover Laws. A number of states throughout the United States have en- acted takeover statutes that purport, in varying degrees, to be applicable to attempts to acquire securities of corporations that are incorporated or have assets, shareholders, executive offices or places of business in such states. In Edgar v. MITE Corp., the Supreme Court of the United States held that the Illinois Business Takeover Act, which involved state securities laws that made the takeover of certain corporations more difficult, imposed a substantial bur- den on interstate commerce and therefore was unconstitutional. In CTS Corp. v. Dynamics Corp. of America, however, the Supreme Court of the United States held that a state may, as a matter of corporate law and, in particular, those laws concerning corporate governance, constitutionally 33 disqualify a potential acquiror from voting on the affairs of a target corpora- tion without prior approval of the remaining shareholders, provided that such laws were applicable only under certain conditions. The Company is incorporated under the laws of Minnesota. The Minnesota Control Share Act requires, among other things, that in order to vote shares of an "Is- suing Public Corporation" acquired over a 20%, 33% or 50% threshold, an "Ac- quiring Person" must receive the approval of the holders of a majority of all shares entitled to vote and the holders of a majority of all shares entitled to vote excluding all "interested shares" at a meeting to be held no later than 55 calendar days following delivery of, among other things, an information state- ment by the Acquiring Person to the Issuing Public Corporation, unless the Ac- quiring Person agrees to a later date. "Interested Shares" are defined to mean shares beneficially owned by an Acquiring Person, by any officers of the Issu- ing Public Corporation and by employee-directors of the Issuing Public Corpora- tion. An "Acquiring Person" is defined as any person that makes or proposes to make an acquisition of, directly or indirectly, beneficial ownership of shares of an Issuing Public Corporation that would, when added to all other shares beneficially owned by such person, entitle such person immediately after such acquisition to exercise or direct the exercise of voting power over a new range or voting power within any of the ranges referred to above. In order to obtain the right under the Minnesota Control Share Act to vote all Shares that may be acquired by Parent or Offeror pursuant to the Offer, Parent or Offeror would be required to deliver to the Company an Information Statement concerning the in- formation required by the Minnesota Control Share Act and request that the Com- pany call a special meeting of shareholders for the sole purpose of considering the voting rights to be accorded to all Shares acquired by Offeror pursuant to the Offer. The above provisions do not apply to a control share acquisition of shares of an Issuing Public Corporation (i) whose articles of corporation or bylaws pro- vide that the Minnesota Control Share Act does not apply to control share ac- quisitions of its shares or (ii) where the acquisition is pursuant to an offer to purchase for cash pursuant to a tender offer all shares of the voting stock of the Issuing Public Corporation (a) which has been approved by a majority vote of the members of a committee comprised of the disinterested members of the Board of Directors of the Issuing Public Corporation before the commence- ment of, or the public announcement of the intent to commence, the tender offer and (b) pursuant to which the Acquiring Person will become the owner of over 50% of the voting stock of the Issuing Public Corporation outstanding at the time of the transaction. The Company's articles of incorporation, as amended, and bylaws, as amended, currently do not exclude the Company from the restrictions imposed by the Min- nesota Control Share Act. However, on August 26, 1999, a special committee com- posed of all of the disinterested members of the Board of Directors approved the Offer, the Merger and the Merger Agreement, the Tender and Option Agreement and the Stock Option Agreement for purposes of the Minnesota Control Share Act, and therefore the Minnesota Control Share Act is inapplicable to the Offer, the Merger, the Merger Agreement, the Tender and Option Agreement and the Stock Op- tion Agreement and the transactions contemplated thereby. Section 302A.673 of the Minnesota Law prohibits any "business combination," in- cluding any merger, for a period of four years following the date that a pur- chaser first acquires beneficial ownership, directly or indirectly, of 10% or more of the outstanding shares of a corporation if the purchaser does not re- ceive approval of a special committee composed of all of the disinterested mem- bers of the corporation's board of directors prior to such acquisition. On Au- gust 26, 1999, a special committee composed of all of the disinterested members of the Board of Directors approved the Offer, the Merger and the Merger Agree- ment, the Tender and Option Agreement and the Stock Option Agreement for pur- poses of Section 302A.673, and, therefore, Section 302A.673 is inapplicable to the Offer, the Merger, the Merger Agreement, the Tender and Option Agreement and the Stock Option Agreement and the transactions contemplated thereby. The Minnesota Takeover Disclosure Law, Minnesota Statutes Ch. 80B.01 et seq., requires certain disclosures and the filing of such disclosures with the Minne- sota Commissioner of Commerce (the "Minnesota Commissioner"). Offeror will promptly file the required disclosure material with the Minnesota Commissioner. Although the Commissioner does not approve such material, he does review it for the adequacy of such disclosure and is empowered to summarily suspend the Offer in Minnesota within three days of such filing if the material does not provide full disclosure. Such summary suspension, if made, would be effective until a hearing is held (within ten days of such hearing, but no more than sixteen days after the initial summary suspension) to make any such suspension permanent, subject to corrective disclosure. Except as described in the Offer, neither Parent nor Offeror has currently com- plied with any state takeover statute or regulation. Offeror reserves the right to challenge the applicability or validity of any state law purportedly appli- cable to 34 the Offer or the Merger and nothing in this Offer to Purchase or any action taken in connection with the Offer or the Merger is intended as a waiver of such right. If it is asserted that any other state takeover statute is applica- ble to the Offer or the Merger and an appropriate court does not determine that it is inapplicable or invalid as applied to the Offer or the Merger, Offeror might be required to file certain information with, or to receive approvals from, the relevant state authorities, and Offeror might be unable to accept for payment or pay for Shares tendered pursuant to the Offer or be delayed in con- summating the Offer or the Merger. In such case, Offeror may not be obliged to accept for payment or pay for any Shares tendered pursuant to the Offer. Appraisal Rights. No appraisal rights are available to holders of Shares in connection with the Offer. However, if the Merger is consummated, holders of Shares will have certain rights under Section 302A.671 of the Minnesota Law (or Section 302A.621 in the case of a "short-form" merger) to dissent and demand appraisal of, and payment in cash for the fair value of, their Shares. Such rights, if the statutory procedures are complied with, could lead to a judicial determination of the fair value (excluding any element of value arising from accomplishment or expectation of the Merger) required to be paid to such dis- senting holders for their Shares. Any such judicial determination of the fair value of Shares could be based upon any valuation method or combination of methods the court deems appropriate to use. The value so determined could be more or less than the Offer Price or the Merger Consideration. If any holder of Shares who demands appraisal fails to perfect, or effectively withdraws or losses his right to appraisal, as provided in the Minnesota Law, the shares of such holder will be converted into the Merger Consideration in accordance with the Merger Agreement. A shareholder may withdraw his demand for appraisal by delivery to Parent of a written withdrawal of his demand for ap- praisal and acceptance of the Merger. Failure to follow the steps required by the Minnesota Law for perfecting ap- praisal rights may result in the loss of such rights. Rule 13e-3. The Commission has adopted Rule 13e-3 under the Exchange Act ("Rule 13e-3"), which is applicable to certain "going private" transactions. Rule 13e- 3 requires, among other things, that certain financial information concerning the Company and certain information relating to the fairness of the proposed transaction and the consideration offered to minority shareholders in such transaction be filed with the Commission and disclosed to shareholders prior to consummation of the transaction. Parent believes that Rule 13e-3 will not be applicable to the Merger because of the exemption afforded by Rule 13e-3(g)(1), among other reasons. However, under certain circumstances, Rule 13e-3 could be applicable to the Merger or other business combination in which Parent seeks to acquire the remaining Shares it does not beneficially own following the purchase of Shares pursuant to the Of- fer. For example, if the Merger as consummated is not substantially similar to the Merger as described in this Offer to Purchase and the Merger Agreement, Rule 13e-3 could apply. However, the terms and conditions of the Merger are governed by the Merger Agreement, and any amendment to the Merger Agreement must be approved by each party thereto. If Parent has exercised its right to appoint directors to the Board of Directors following its purchase of Shares pursuant to the Offer, any such amendment must be approved on behalf of the Company by the directors of the Company, in the manner set forth above. There can be no assurance that the Merger will take place, even though each party has agreed in the Merger Agreement to use its reasonable efforts to cause the Merger to occur, because the Merger is subject to certain conditions, some of which are beyond the control of either Parent or the Company. Since Parent's ultimate objective is to acquire ownership of all the Shares, if the Merger does not take place, Parent would consider the acquisition, whether directly or through an affiliate, of Shares through private or open market purchases, or subsequent tender offers or a different type of merger or other combination of the Company with the Offeror or an affiliate or subsidiary thereof, or by any other permissible means deemed advisable by it. Except as described in the sec- tion captioned "The Merger Agreement," any of these possible transactions might be on terms the same as, or more or less favorable than, those of the Offer or the Merger. Antitrust. Under the HSR Act and the rules that have been promulgated thereun- der by the Federal Trade Commission ("FTC"), certain acquisition transactions may not be consummated unless certain information has been furnished to the An- titrust Division of the Department of Justice (the "Antitrust Division") and the FTC and certain waiting period requirements have been satisfied. The acqui- sition of Shares pursuant to the Offer is subject to these requirements. 35 Parent expects to file a Notification and Report Form with respect to the Offer under the HSR Act as soon as practicable following commencement of the Offer. The waiting period under the HSR Act with respect to the Offer will expire at 11:59 p.m., Washington, D.C. time, on the 15th day after the date such form is filed, unless early termination of the waiting period is granted. In addition, the Antitrust Division or the FTC may extend such waiting period by requesting additional information or documentary material from Parent. If such a request is made with respect to the Offer, the waiting period related to the Offer will expire at 11:59 p.m., Washington, D.C. time, on the 10th day after substantial compliance by Parent with such request. With respect to each acquisition, the Antitrust Division or the FTC may issue only one request for additional infor- mation. In practice, complying with a request for additional information or ma- terial can take a significant amount of time. Expiration or termination of ap- plicable waiting periods under the HSR Act is a condition to Offeror's obliga- tion to accept for payment and pay for Shares tendered pursuant to the Offer. The FTC and the Antitrust Division frequently scrutinize the legality under the antitrust laws of transactions such as Offeror's proposed acquisition of the Company. At any time before or after Offeror's purchase of Shares pursuant to the Offer, the Antitrust Division or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, in- cluding seeking to enjoin the purchase of Shares pursuant to the Offer or the consummation of the Merger or seeking the divestiture of Shares acquired by Offeror or the divestiture of substantial assets of Parent or its subsidiaries, or the Company or its subsidiaries. Private parties may also bring legal action under the antitrust laws under certain circumstances. There can be no assurance that a challenge to the Offer on antitrust grounds will not be made or, if such a challenge is made, of the results thereof. 16. Fees and Expenses. J.P. Morgan Securities Inc. ("J.P. Morgan") is acting as financial advisor to Parent and Offeror and Dealer Manager in connection with the Offer. Parent has agreed to pay J.P. Morgan customary fees for its services as financial advisor and Dealer Manager in connection with the Offer. Parent has also agreed to re- imburse J.P. Morgan for certain reasonable expenses incurred in connection with the Offer and to indemnify J.P. Morgan against certain liabilities. Parent has retained D.F. King & Co., Inc. to act as the Information Agent and ChaseMellon Shareholder Services, L.L.C. to serve as the Depositary in connec- tion with the Offer. The Information Agent and the Depositary each will receive reasonable and customary compensation for their services, be reimbursed for certain reasonable out-of-pocket expenses and be indemnified against certain liabilities and expenses in connection therewith, including certain liabilities under the federal securities laws. Except as described herein, neither Parent nor Offeror will pay any fees or commissions to any broker or dealer or other person in connection with the so- licitation of tenders of Shares pursuant to the Offer. Brokers, dealers, banks and trust companies will be reimbursed by Offeror upon request for customary mailing and handling expenses incurred by them in forwarding material to their customers. 17. Miscellaneous. The Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the laws of such juris- diction. Neither Parent nor Offeror is aware of any jurisdiction in which the making of the Offer or the tender of Shares in connection therewith would not be in compliance with the laws of such jurisdiction. If Parent or Offeror be- comes aware of any state law prohibiting the making of the Offer or the accept- ance of Shares pursuant thereto in such state, Offeror will make a good faith effort to comply with any such state statute or seek to have such state statute declared inapplicable to the Offer. If, after such good faith effort, Offeror cannot comply with any such state statute, the Offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of Shares in such jurisdiction. In any jurisdiction the securities, blue sky or other laws of which require the Offer to be made by a licensed broker or dealer, the Offer will be made on behalf of Offeror by J.P. Morgan or by one or more registered brokers or dealers licensed under the laws of such jurisdiction. No person has been authorized to give any information or to make any represen- tation on behalf of Parent or Offeror not contained herein or in the Letter of Transmittal and, if given or made, such information or representation must not be relied upon as having been authorized. Neither the delivery of this Offer to Purchase nor any purchase pursuant to the Offer shall, under any circumstances, create any implication that there has been no change in the affairs of Parent or the Company since the date as of which information is furnished or the date of this Offer to Purchase. 36 Parent and Offeror have filed with the Commission the Schedule 14D-1 pursuant to Rule 14d-3 under the Exchange Act, furnishing certain additional information with respect to the Offer. In addition, the Company has filed with the Commis- sion the Schedule 14D-9 pursuant to Rule 14d-9 under the Exchange Act, setting forth its recommendation with respect to the Offer and the reasons for such recommendation and furnishing certain additional related information. Such schedules and any amendments thereto, including exhibits, should be available for inspection and copies should be obtainable in the manner set forth in Sec- tions 8 and 9 (except that they will not be available at the regional offices of the Commission). TENZING, INC. September 1, 1999 37 SCHEDULE I DIRECTORS AND EXECUTIVE OFFICERS OF PARENT AND OFFEROR The names and ages of the directors and executive officers of Parent and of Offeror, and their present principal occupations or employment and five-year employment history, are set forth below. Unless otherwise indicated, each individual is a citizen of the United States, his/her business address is One Procter & Gamble Plaza, Cincinnati, Ohio 45202-3315 and he/she has been employed by Parent for the last five years. PARENT Present Principal Occupation or Employment with The Procter & Gamble Company; Material Positions Held Name and Age During the Past Five Years ------------ --------------------------------------------------- Donald R. Beall (60)...... Retired Chairman and Chief Executive Officer, Rockwell International Corporation (industrial automation, avionics and communications and electronic commerce) and Chairman of the Executive Committee. Director of Rockwell International Corporation, Conexant Systems, Inc., Meritor Automotive, Inc. and Times-Mirror Company; Director of Parent since 1992; Chairman of the Audit Committee and member of the Executive and Public Policy Committee. Gordon F. Brunner (60).... Chief Technology Officer with responsibility for Research and Development since 1994. Director of Parent since 1991. Richard B. Cheney (58).... Chief Executive Officer, Halliburton Company (energy services, engineering and construction). Director of Halliburton Company, Electronic Data Systems Corporation and Union Pacific Corporation; Director of Parent since 1993; member of the Audit, Compensation and Public Policy Committees. Durk I. Jager (56)........ Chairman of the Board, President and Chief Executive. Director of Eastman Kodak Company; Director of Parent since 1989; member of the Executive Committee. Charles R. Lee (59)....... Chairman and Chief Executive Officer, GTE Corporation (telecommunication services). Director of GTE Corporation, United Technologies Corporation and USX Corporation. Director of Parent since 1994; member of the Audit, Board Organization and Nominating, and Compensation Committees. Edwin L. Artzt (69)....... Retired Chairman of the Board and Chief Executive, Chairman of the Board of Spalding Sports Worldwide, Inc. Director of American Express Company, Delta Air Lines, Inc., Evenflo Company, Inc. and GTE Corporation; Director of Parent from 1972 to 1975 and since 1980; Chairman of the Executive Committee and member of the Finance and Public Policy Committees.
I-1 Present Principal Occupation or Employment with The Procter & Gamble Company; Material Positions Held Name and Age During the Past Five Years ------------ --------------------------------------------------- Norman R. Augustine Chairman of the Executive Committee, Lockheed Martin (64).................... Corporation (aerospace, electronics, telecommunications, information management and energy systems). Director of Lockheed Martin Corporation, The Black and Decker Corporation and Phillips Petroleum Company; Director of Parent since 1989; Chairman of the Compensation Committee and member of the Executive and Finance Committees Richard J. Ferris (63)... Retired Co-Chairman, Doubletree Corporation. Director of BP Amoco Corporation and Candlewood Hotel Company, Inc.; Director of Parent since 1979; Chairman of the Finance Committee and member of the Executive and Public Policy Committees John C. Sawhill, Ph.D. President and Chief Executive Officer, The Nature (63).................... Conservancy (an international conservation organization). Director of Pacific Gas & Electric Company, NAACO Industries, Newfield Exploration Company and Vanguard Group of Mutual Funds; Director of Parent since 1996; member of the Audit, Board Organization and Nominating, and Public Policy Committees John F. Smith, Jr. (61).. Chairman, Chief Executive Officer, General Motors Corporation (automobile and related businesses). Director of General Motors Corporation; Director of Parent since 1995; member of the Audit, Board Organization and Nominating, and Public Policy Committees Marina v.N. Whitman, Professor of Business Administration and Public Ph.D. (64).............. Policy, University of Michigan. Director of Aluminum Company of America, Browning-Ferris Industries, Inc., Chase Manhattan Corporation and its subsidiary Chase Manhattan Bank, and Unocal Corporation; Director of Parent since 1976; Chairman of the Board Organization and Nominating Committee, and member of the Compensation and Finance Committee Joseph T. Gorman (61).... Chairman and Chief Executive Officer, TRW Inc. (electronic, automotive, industrial and aerospace equipment). Director of TRW Inc. and Aluminum Company of America; Director of Parent since 1993; member of the Compensation, Executive and Finance Committees Lynn M. Martin (59)...... Professor, J. L. Kellogg Graduate School of Management, Northwestern University. Director of Ameritech Corporation, Ryder System, Inc., TRW Inc., Dreyfus Funds and Harcourt General Inc.; Director of Parent since 1994; member of the Finance, Board Organization and Nominating, and Public Policy Committees
I-2 Present Principal Occupation or Employment with The Procter & Gamble Company; Material Positions Held Name and Age During the Past Five Years ------------ --------------------------------------------------- John E. Pepper (61)...... Retired Chairman of the Board. Director of Motorola, Inc. and Xerox Corporation; Director of Parent since 1984; member of the Executive Committee. Ralph Snyderman, M.D. Chancellor for Health Affairs, Executive Dean, (59).................... School of Medicine at Duke University, and President/CEO of Duke University Health System. Director of Ariad, Inc.; Director of Parent since 1995; member of the Audit, Board Organization and Nominating, and Public Policy Committees. Robert D. Storey (63).... Partner in the law firm of Thompson, Hine & Flory, L.L.P., Cleveland, Ohio. Director of GTE Corporation and The May Department Stores Company; Director of Parent since 1988; Chairman of the Public Policy Committee and member of the Audit and Board Organization and Nominating Committees. Wolfgang C. Berndt (56).. January 1, 1999--President-Global Fabric & Home Care and Europe; 1995-1998--responsible for the North American region; 1994-1995--responsible for Health and Beauty Care Products-Europe. Alan G. Lafley (52)...... January 1, 1999--President-Global Beauty Care and North America; 1998-1999--responsible for North American region; 1994-1998--responsible for Asian region. Jorge P. Montoya (53).... January 1, 1999--President-Global Food & Beverage and Latin America; 1994-1999--responsible for Latin American region. Richard L. Antoine (53).. July 1, 1999--Global Human Resources and Product Supply Officer; 1998-July 1, 1999--responsible for Human Resources; 1995-1998--responsible for Product Supply in Asia; 1994-1995--responsible for Product Supply in North America. Bruce L. Byrnes (51)..... January 1, 1999--President-Global Health Care and Corporate New Ventures; 1996-1998--responsible for Health Care in North America; 1995-1996--responsible for Paper Products in North America; 1994-1995-- responsible for Paper and Beverage in Europe. R. Kerry Clark (47)...... April 1, 1999--President-Global Feminine Protection and Asia; 1998-1999--responsible for Asian region; 1995-1998--responsible for Laundry and Cleaning in North America; 1994-1995--responsible for Laundry in North America. Clayton C. Daley, Jr. 1998--Chief Financial Officer; 1994-1998--Vice (47).................... President and Treasurer. Stephen N. David (50).... 1998--Global Customer Business Development Officer with responsibilities for Sales; 1994-1998-- responsible for Sales in North America. James J. Johnson (52).... 1994--Chief Legal Officer.
I-3 Present Principal Occupation or Employment with The Procter & Gamble Company; Material Positions Held Name and Age During the Past Five Years ------------ --------------------------------------------------- Mark D. Ketchum (49)..... January 1, 1999--President-Global Baby Care; 1996- 1999--responsible for Paper in North America; 1994- 1996--responsible for Tissue and Towels in North America. Gary T. Martin (54)...... July 1, 1999--President-Global Tissues & Towel; January 1, 1999-July 1, 1999--responsible for Global Tissues & Towel and product Supply; 1994-1999-- responsible for Information Services and Product Supply. David R. Walker (44)..... 1997--Vice President and Comptroller; 1994-1997-- Vice President-Finance. OFFEROR
Present Principal Occupation or Employment with Tenzing, Inc.; Material Positions Held During the Name and Age Past Five Years ------------ ---------------------------------------------------- Bruce L. Byrnes (51)..... Director and President; January 1, 1999--President- Global Health Care and Corporate New Ventures, Parent; 1996-1998--responsible for Health Care in North America, Parent; 1995-1996--responsible for Paper Products in North America, Parent; 1994-1995-- responsible for Paper and Beverage in Europe, Parent. Clayton C. Daley, Jr. Director and Vice President and Chief Financial (47).................... Officer; 1998--Chief Financial Officer, Parent; 1994-1998--Vice President and Treasurer, Parent. Gretchen W. Price (44)... Director and Vice President and Treasurer; 1998-- Vice President and Treasurer, Parent; 1996-1998-- responsible for Internal Controls-Worldwide, Parent; 1994-1996--Vice President and Comptroller with responsibilities for Food and Beverage Products in North America, Parent.
I-4 MANUALLY SIGNED FACSIMILE COPIES OF THE LETTER OF TRANSMITTAL WILL BE ACCEPTED. THE LETTER OF TRANSMITTAL AND CERTIFICATES FOR SHARES AND ANY OTHER REQUIRED DOCUMENTS SHOULD BE SENT OR DELIVERED BY EACH SHAREHOLDER OR HIS BROKER, DEAL- ER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE TO THE DEPOSITARY AT ONE OF THE ADDRESSES SET FORTH BELOW: The Depositary for the Offer is: ChaseMellon Shareholder Services, L.L.C. By Mail: By Hand in New York: By Hand/Overnight Courier: Reorganization Reorganization Reorganization Department Department Department 85 Challenger Road PO Box 3301 120 Broadway Mail Stop-Reorg South Hackensack, NJ 13th Floor Ridgefield Park, NJ 07660 07606 New York, NY 10271 Facsimile Copy Number (for eligible institutions only): (201) 296-4293 For Confirmation Telephone: (201) 296-4860 Any questions or requests for assistance or additional copies of the Offer to Purchase and the Letter of Transmittal and Notice of Guaranteed Delivery may be directed to the Information Agent at its telephone number and location listed below. Shareholders may also contact their broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Offer. The Information Agent for the Offer is: D.F. King & Co., Inc. 77 Water Street New York, New York 10005 Banks and Brokerage Firms Call Collect: (212) 425-1685 All Others Call Toll Free: (800) 549-6697 The Dealer Manager for the Offer is: J.P. Morgan & Co. 60 Wall Street New York, New York 10260 Call Toll Free (877) 639-5307 EX-99.(A)(2) 3 LETTER OF TRANSMITTAL LETTER OF TRANSMITTAL To Tender Shares of Common Stock (Including the Associated Rights) of RECOVERY ENGINEERING, INC. Pursuant to the Offer to Purchase Dated September 1, 1999 by TENZING, INC. a direct wholly owned subsidiary of THE PROCTER & GAMBLE COMPANY THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, SEPTEMBER 29, 1999, UNLESS THE OFFER IS EXTENDED. The Depositary is: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. By Mail: By Hand in New York: By Hand/Overnight Couri- er: Reorganization Department Reorganization Department PO Box 3301 120 Broadway Reorganization Department South Hackensack, NJ 13th Floor 85 Challenger Road 07606 New York, NY 10271 Mail Stop-Reorg Ridgefield Park, NJ 07660 By Facsimile Transmission (for eligible institutions only): (201) 296-4293 To Confirm Receipt of Notice of Guaranteed Delivery: (201) 296-4860 DESCRIPTION OF SHARES TENDERED - --------------------------------------------------------------------------------
Name(s) and Address(es) of Registered Holder(s) (Please fill in, if blank, exactly as name(s) appear(s) on the Certificate(s) Enclosed Certificate(s)) (Attach additional signed list, if necessary) - ------------------------------------------------------------------------------------ Total Number of Shares Represented Certificate by Number of Number(s)* Certificate(s)* Shares Tendered** ----------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- Total Number of Shares - ------------------------------------------------------------------------------------
* Need not be completed by shareholders delivering Shares by book-entry transfer through the Depositary. ** Unless otherwise indicated, it will be assumed that all Shares represented by any certificates delivered to the Depositary are being tendered. See Instruction 4. [_]CHECK HERE IF CERTIFICATES HAVE BEEN LOST OR MUTILATED. SEE INSTRUCTION 12. DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY TO THE DEPOSITARY. YOU MUST SIGN THIS LETTER OF TRANSMITTAL IN THE APPROPRIATE SPACE PROVIDED BELOW AND COMPLETE THE SUBSTITUTE FORM W-9 SET FORTH BELOW. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. This Letter of Transmittal is to be completed by shareholders of Recovery Engineering, Inc. if (i) certificates evidencing Shares ("Certificates") are to be forwarded with this Letter of Transmittal or (ii) unless an Agent's Message (as defined in the Offer to Purchase) is utilized, if delivery of Shares (as defined below) is to be made by book-entry transfer to an account maintained by ChaseMellon Shareholder Services, L.L.C. at The Depository Trust Company or the Philadelphia Depository Trust Company (each a "Book-Entry Transfer Facility" and, collectively, the "Book-Entry Transfer Facilities") pursuant to the procedures set forth in Section 3 of the Offer to Purchase. Delivery of documents to a Book-Entry Transfer Facility does not constitute delivery to the Depositary. Shareholders whose Certificates are not immediately available or who cannot deliver their Certificates and all other required documents to the Depositary prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase), or who cannot complete the procedures for book-entry transfer on a timely basis, must tender their Shares according to the guaranteed delivery procedures set forth in Section 3 of the Offer to Purchase. See Instruction 2. [_]CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE DEPOSITARY WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING (ONLY PARTICIPANTS IN THE BOOK-ENTRY TRANSFER FACILITY MAY DELIVER SHARES BY BOOK-ENTRY TRANSFER): Name of Tendering Institution: _____________________________________________ Account Number: _________________________________________________________ at Transaction Code Number: ___________________________________________________ [_]CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING. PLEASE ENCLOSE A PHOTOCOPY OF SUCH NOTICE OF GUARANTEED DELIVERY. Name(s) of Registered Stockholder(s): ______________________________________ Window Ticket Number (if any): _____________________________________________ Date of Execution of Notice of Guaranteed Delivery: ________________________ Name of Institution which Guaranteed Delivery: _____________________________ NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. 2 Ladies and Gentlemen: The undersigned hereby tenders to Tenzing, Inc. ("Offeror"), a Minnesota corporation and a direct, wholly owned subsidiary of The Procter & Gamble Company, an Ohio corporation ("Parent"), the above-described shares of Common Stock, par value $0.01 per share (the "Common Stock"), including the associated stock purchase rights issued pursuant to the Rights Agreement, dated January 30, 1996, as amended, between the Company and Norwest Bank Minnesota, N.A., as Rights Agent (the "Rights" and, together with the Common Stock, the "Shares") of Recovery Engineering, Inc., a Minnesota corporation (the "Company"), pursuant to Offeror's offer to purchase all of the outstanding Shares at a purchase price of $35.25 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated September 1, 1999 (the "Offer to Purchase"), receipt of which is hereby acknowledged, and in this Letter of Transmittal (which, as amended from time to time, together with the Offer to Purchase collectively constitute the "Offer"). The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of August 26, 1999 (the "Merger Agreement"), by and among Parent, Offeror and the Company. The undersigned understands that Offeror reserves the right to transfer or assign, in whole or from time to time in part, to any of its affiliates, the right to purchase all or any portion of the Shares tendered pursuant to the Offer, but any such transfer or assignment will not relieve Offeror of its obligations under the Offer or prejudice the rights of the tendering shareholders to receive payment for Shares validly tendered and accepted for payment pursuant to the Offer. Subject to, and effective upon, acceptance for payment of, or payment for, the Shares tendered herewith, the undersigned hereby sells, assigns and transfers to, or upon the order of, Offeror all right, title and interest in and to all the Shares that are being tendered hereby (and any and all other shares or other securities issued or issuable in respect of such Shares on or after August 26, 1999) and appoints ChaseMellon Shareholder Services, L.L.C. (the "Depositary") the true and lawful agent and attorney-in-fact of the undersigned with respect to such Shares (and such other shares or securities), with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to (a) deliver certificates for such Shares (and such other shares or securities), or transfer ownership of such Shares (and such other Shares or securities) on the account books maintained by a Book-Entry Transfer Facility, together, in any such case, with all accompanying evidences of transfer and authenticity, to or upon the order of Offeror, (b) present such Shares (and such other shares or securities) for transfer on the books of the Company and (c) receive all benefits and otherwise exercise all rights of beneficial ownership of such Shares (and such other shares or securities), all in accordance with the terms and subject to the conditions of the Offer. The undersigned hereby irrevocably appoints each designee of Offeror as the attorney-in-fact and proxy of the undersigned, each with full power of substitution, to the full extent of the rights of the undersigned with respect to the Shares tendered herewith and accepted for payment by Offeror prior to the time of any vote or other action (and any and all other shares or other securities issued or issuable in respect of such Shares on or after the date of the Offer to Purchase). All such powers of attorney and proxies shall be considered irrevocable and coupled with an interest. Such appointment will be effective when, and only to the extent that, Offeror accepts such Shares for payment. Upon such acceptance for payment, all prior powers of attorney and proxies given by the shareholder with respect to such Shares (and such other shares and securities) will, without further action, be revoked and no subsequent powers of attorney and proxies may be given nor any subsequent written consents executed (and, if given or executed, will not be deemed effective). The designees of Offeror will, with respect to the Shares (and such other shares and securities) for which such appointment is effective, be empowered to exercise all voting and other rights of such shareholder as they in their sole discretion may deem proper at any annual or special meeting of the Company's shareholders, or any adjournment or postponement thereof by written consent in lieu of any such meeting or otherwise. Offeror reserves the right to require that, in order for Shares to be deemed validly tendered, immediately upon Offeror's payment for such Shares, Offeror must be able to exercise full voting and other rights with respect to such Shares (and such other shares and securities), including voting at any meeting of shareholders then scheduled. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Shares tendered hereby (and any and all other shares or other securities issued or issuable in respect of such Shares on or after the date of the Offer to Purchase) and that when the same are accepted for payment by Offeror, Offeror will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The undersigned, upon request, will execute and deliver any additional documents deemed by 3 the Depositary or Offeror to be necessary or desirable to complete the sale, assignment and transfer of the Shares tendered hereby (and such other shares or securities). All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned, and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Except as stated in the Offer, this tender is irrevocable. The undersigned understands that tenders of Shares pursuant to any one of the procedures described in Section 3 of the Offer to Purchase and in the instructions hereto will constitute a binding agreement between the undersigned and Offeror upon the terms and subject to the conditions of the Offer. The undersigned recognizes that, under certain circumstances set forth in the Offer to Purchase, Offeror may not be required to accept for payment any of the Shares tendered hereby. Unless otherwise indicated in this Letter of Transmittal under "Special Payment Instructions," please issue the check for the purchase price and return any Shares not tendered or not purchased in the name(s) of the undersigned. Similarly, unless otherwise indicated under "Special Delivery Instructions," please mail the check for the purchase price and return any Certificates not tendered or not purchased (and accompanying documents, as appropriate) to the undersigned at the address shown below the undersigned's signature(s). In the event that both "Special Payment Instructions" and "Special Delivery Instructions" are completed, please issue the check for the purchase price and return any Shares not tendered or not purchased in the name(s) of, and mail such check and any certificates to, the person(s) so indicated. Unless otherwise indicated under "Special Payment Instructions," in the case of book-entry delivery of Shares, please credit the account maintained at a Book-Entry Transfer Facility with respect to any Shares not accepted for payment. The undersigned recognizes that Offeror has no obligation pursuant to the "Special Payment Instructions" to transfer any Shares from the name of the registered holder(s) thereof if Offeror does not accept for payment any of the Shares so tendered. 4 SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (See Instructions 1, 5, 6, and 7) (See Instructions 1, 5, 6 and 7) To be completed ONLY if the To be completed ONLY if the check for the purchase price of check for the purchase price of Shares accepted for payment Shares accepted for payment and/or Certificates for Shares and/or Certificates for Shares not tendered or not accepted for not tendered or not accepted for payment are to be issued in the payment are to be mailed to some- name of someone other than the one other than the undersigned or undersigned, or if Shares deliv- to the undersigned at an address ered by book-entry transfer that other than that shown above. are not accepted for payment are to be returned by credit to an Mail check and/or certificate(s) account maintained at a Book-En- to: try Transfer Facility other than the account indicated above. Name______________________________ (Please Type or Print) Mail check and/or certificate(s) to: Address __________________________ Name _____________________________ __________________________________ (Please Type or Print) (Include a Zip Code) Address __________________________ __________________________________ (Recipient's Taxpayer Identification or Social Security __________________________________ Number) (Also complete Substitute Form W- (Include a Zip Code) 9 below) __________________________________ (Recipient's Taxpayer Identification or Social Security Number) (Also complete Substitute Form W- 9 below) 5 IMPORTANT: SHAREHOLDER: SIGN HERE (Please Complete Substitute Form W-9 Below) ............................................................................ ............................................................................ Signature(s) of Shareholder(s) Dated: ........................., 1999 (Must be signed by registered holder(s) exactly as name(s) appear(s) on Certificate(s) or on a security position listing or by the person(s) authorized to become registered holder(s) by Certificates and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, agent, officer of a corporation or other person acting in a fiduciary or representative capacity, please set forth full title and see Instruction 5). Name(s):.................................................................... (Please Type or Print) Capacity (full title): ..................................................... Address:.................................................................... ..................................................................... (Include a Zip Code) ..................................................................... Area Code and Telephone Number: ............................................ (home) .................................................... (business) Tax Identification Number or Social Security Number: ....................... (See Substitute Form W-9 below) GUARANTEE OF SIGNATURE(S) (See Instructions 1 and 5) FOR USE BY FINANCIAL INSTITUTIONS ONLY, PLACE MEDALLION GUARANTEE IN SPACE BELOW. Authorized Signature(s): ................................................... Name: ...................................................................... (Please Type or Print) Title: ..................................................................... Name of Firm: .............................................................. Address:.................................................................... ............................................................................ (Include a Zip Code) Area Code and Telephone Number: ............................................ Dated: ..............................................................., 1999 6 TO BE COMPLETED BY ALL TENDERING SHAREHOLDERS OF SECURITIES PAYER'S NAME: ChaseMellon Shareholder Services, L.L.C. - ------------------------------------------------------------------------------- Part 1--PLEASE PROVIDE YOUR TIN: _________________ SUBSTITUTE TIN IN THE BOX AT THE RIGHT (Social Security Number Form W-9 AND CERTIFY BY SIGNING AND or DATING BELOW. Taxpayer Identification Number) -------------------------------------------------------- Department of the Part 3--CERTIFICATION--UNDER PENALTIES OF PERJURY, I Treasury CERTIFY THAT: Internal Revenue Service Part 2--FOR PAYEES EXEMPT FROM BACKUP WITHHOLDING (See Instructions). -------------------------------------------------------- Payer's Request for (1) The number shown on this form is my correct TIN Taxpayer (or I am waiting for a number to be issued to Identification me); and Number ("TIN") and Certification (2) I am not subject to backup withholding because (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding. -------------------------------------------------------- Signature: _________________________ Date: _________ Certification Instructions--You must cross out item (2) of Part 3 above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding, you received another notification from the IRS that you were no longer subject to backup withholding, do not cross out item (2) of Part 3. NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU ARE AWAITING YOUR TIN. CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a TIN has not been issued to me, and either (1) I have mailed or delivered an application to receive a TIN to the appropriate IRS Center or Social Security Administration Office or (2) I intend to mail or deliver an application in the near future. I understand that if I do not provide a TIN by the time of payment, 31% of all payments pursuant to the Offer made to me will be withheld, but such amounts will be refunded to me if I then provide a TIN within sixty (60) days. Signature: __________________________________________ Date: _____________ 7 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER 1. Guarantee of Signatures. Except as otherwise provided below, signatures on Letters of Transmittal must be guaranteed by a bank, broker, dealer, credit union or savings association or other entity that is a member in good standing of a recognized Medallion Program approved by the Securities Transfer Association, Inc. (each of the foregoing being referred to as an "Eligible Institution" and, collectively, as "Eligible Institutions"), except in cases where Shares are tendered (i) by a registered holder of Shares who has not completed either the box labeled "Special Delivery Instructions" or the box labeled "Special Payment Instructions" on the Letter of Transmittal or (ii) for the account of any Eligible Institution. See Instruction 5. If the Certificates are registered in the name of a person other than the signer of this Letter of Transmittal, or if payment is to be made, or Certificates not accepted for payment or not tendered are to be returned, to a person other than the registered holder, then the Certificates must be endorsed or accompanied by duly executed stock powers, in either case, signed exactly as the name of the registered holder appears on such Certificates, with the signatures on such Certificates or stock powers guaranteed by an Eligible Institution as provided herein. See Instruction 5. 2. Requirements of Tender. This Letter of Transmittal is to be used if (i) Certificates are to be forwarded herewith or (ii) unless an Agent's Message is utilized, if delivery of Shares is to be made by book-entry transfer pursuant to the procedures set forth in Section 3 of the Offer to Purchase. Certificates for all physically delivered Shares, or a confirmation of a book- entry transfer into the Depositary's account at one of the Book-Entry Transfer Facilities of all Shares delivered electronically, as well as a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof) and any other documents required by this Letter of Transmittal or an Agent's Message in the case of a book-entry delivery, must be received by the Depositary at one of its addresses set forth on the front page of this Letter of Transmittal by the Expiration Date. Shareholders who cannot deliver their Shares and all other required documents to the Depositary by the Expiration Date must tender their Shares pursuant to the guaranteed delivery procedures set forth in Section 3 of the Offer to Purchase. Pursuant to such procedures: (a) such tender must be made by or through an Eligible Institution; (b) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by Offeror, must be received by the Depositary prior to the Expiration Date; and (c) the Certificates for all tendered Shares, in proper form for transfer (or a Book-Entry Confirmation), together with a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof), and any required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message, and any other documents required by this Letter of Transmittal must be received by the Depositary within three trading days after the date of such Notice of Guaranteed Delivery, all as provided in Section 3 of the Offer to Purchase. The term "trading day" is any day on which the NASDAQ National Market is open for business. The method of delivery of Shares, the Letter of Transmittal and all other required documents, including delivery through a Book-Entry Transfer Facility, is at the election and risk of the tendering shareholder. If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. No alternative, conditional or contingent tenders will be accepted, and no fractional Shares will be purchased. By executing this Letter of Transmittal (or a manually signed facsimile thereof), the tendering shareholder waives any right to receive any notice of the acceptance for payment of the Shares. 3. Inadequate Space. If the space provided in this Letter of Transmittal is inadequate, the information required under "Description of Shares Tendered" should be listed on a separate schedule attached hereto. 4. Partial Tenders (not applicable to shareholders who tender by book-entry transfer). If fewer than all the Shares represented by any Certificate delivered to the Depositary are to be tendered, fill in the number of Shares which are to be tendered in the box entitled "Number of Shares Tendered." In such case, a new Certificate for the remainder of the Shares represented by the old Certificate(s) will be sent to the person(s) signing this Letter of Transmittal unless otherwise provided in the appropriate box on this Letter of Transmittal, as promptly as practicable after the Expiration Date. All Shares represented by Certificate(s) delivered to the Depositary will be deemed to have been tendered unless otherwise indicated. 8 5. Signatures on Letter of Transmittal; Instruments of Transfer and Endorsements. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, the signature(s) must correspond with the name(s) as written on the face of the Certificates without alteration, enlargement or any change whatsoever. If any of the Shares tendered hereby are held of record by two or more persons, all such persons must sign this Letter of Transmittal. If any of the Shares tendered hereby are registered in different names on different Certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of Certificates. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, no endorsements of Certificates or separate stock powers are required unless payment of the purchase price is to be made, or Shares not tendered or not purchased are to be returned, in the name of any person other than the registered holder(s), in which case, the Certificate(s) for such Shares tendered hereby must be endorsed, or accompanied by appropriate stock powers, in either case, signed exactly as the name(s) of the registered holder(s) appears(s) on the Certificate(s) for such Shares. Signatures on any such Certificates or stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered holder(s) of the Shares tendered hereby, the Certificate must be endorsed or accompanied by appropriate stock powers, in either case, signed exactly as the name(s) of the registered holder(s) appear(s) on the Certificates for such Shares. Signature(s) on any such Certificates or stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal or any Certificate or stock power is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing, and proper evidence satisfactory to Offeror of the authority of such person so to act must be submitted. 6. Stock Transfer Taxes. Except as set forth in this Instruction 6, Offeror will pay any stock transfer taxes with respect to the sale and transfer of any Shares to it or its order pursuant to the Offer. If, however, payment of the purchase price is to be made to, or Shares not tendered or not purchased are to be returned in the name of, any person other than the registered holder(s), then the amount of any stock transfer taxes (whether imposed on the registered holder(s), such other person or otherwise) payable on account of the transfer to such person will be deducted from the purchase price unless satisfactory evidence of the payment of such taxes, or exemption therefrom, is submitted. Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the Certificates listed in this Letter of Transmittal. 7. Special Payment and Delivery Instructions. If the check for the purchase price of any Shares purchased is to be issued, or any Shares not tendered or not purchased are to be returned, in the name of a person other than the person(s) signing this Letter of Transmittal or if the check or any Certificates not tendered or not purchased are to be mailed to someone other than the person(s) signing this Letter of Transmittal or to the person(s) signing this Letter of Transmittal at an address other than that shown above, the appropriate boxes on this Letter of Transmittal should be completed. Shareholders tendering Shares by book-entry transfer may request that Shares not purchased be credited to an account maintained at a Book-Entry Transfer Facility as such shareholder may designate under "Special Payment Instructions." If no such instructions are given, any such Shares not purchased will be credited to an account maintained at a Book-Entry Transfer Facility. 8. Substitute Form W-9. Each tendering shareholder is required to provide the Depositary with a correct Taxpayer Identification Number ("TIN") on Substitute Form W-9, which is provided under "Important Tax Information" below and to certify that the shareholder is not subject to backup withholding. Failure to provide the information on the Substitute Form W-9 may subject the tendering shareholder to a penalty and 31% federal income tax backup withholding on the payment of the purchase price for the Shares. If the tendering shareholder has not been issued a TIN and has applied for a TIN or intends to apply for a TIN in the near future, the tendering shareholder should follow the instructions set forth in Part 3 of the 9 Substitute Form W-9 and sign and date both the Substitute Form W-9 and the "Certificate of Awaiting Taxpayer Identification Number." If the shareholder has indicated in Part 3 that a TIN has been applied for and the Depositary is not provided with a TIN by the time of payment, the Depositary will withhold 31% of all payments of the purchase price. Such amounts, however, will be refunded if a TIN is provided to the Depositary within 60 days. 9. Foreign Holders. Foreign holders must submit a completed IRS Form W-8 to avoid 31% backup withholding. IRS Form W-8 may be obtained by contacting the Depositary at one of the addresses on the face of this Letter of Transmittal. 10. Requests for Assistance or Additional Copies. Requests for assistance or additional copies of the Offer to Purchase and this Letter of Transmittal may be obtained from the Information Agent at the address or telephone number set forth below. 11. Waiver of Conditions. The conditions of the Offer may be waived by Offeror (subject to certain limitations in the Merger Agreement), in whole or in part, at any time or from time to time, in Offeror's sole discretion. 12. Lost or Destroyed Certificates. If any Certificate(s) representing Shares has been lost or destroyed, the holders should promptly notify the Transfer Agent, Norwest Bank Minnesota, N.A., at (651) 450-4058. The holders will then be instructed as to the procedure to be followed in order to replace the Certificate(s). This Letter of Transmittal and related documents cannot be processed until the procedures for replacing lost or destroyed Certificates have been followed. IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE COPY HEREOF (TOGETHER WITH CERTIFICATES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE DEPOSITARY PRIOR TO THE EXPIRATION DATE (AS DEFINED IN THE OFFER TO PURCHASE). 10 IMPORTANT TAX INFORMATION Under federal income tax law, a shareholder whose tendered Shares are accepted for payment is required to provide the Depositary (as payor) with such shareholder's correct TIN on the Substitute Form W-9. If such shareholder is an individual, the TIN is such shareholder's social security number. If the Depositary is not provided with the correct TIN, the shareholder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such shareholder with respect to Shares purchased pursuant to the Offer may be subject to backup withholding. Certain shareholders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements and should indicate their status by writing "exempt" across the face of, and by signing and dating, the substitute Form W-9. In order for a foreign individual to qualify as an exempt recipient, that shareholder must submit a statement, signed under penalties of perjury, attesting to that individual's exempt status. Such statements may be obtained from the Depositary. All exempt recipients (including foreign persons wishing to qualify as exempt recipients) should see the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. If backup withholding applies, the Depositary is required to withhold 31% of any payments made to the shareholder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If backup withholding results in an overpayment of taxes, a refund may be obtained from the IRS. Purpose of Substitute Form W-9 To prevent backup federal income tax withholding on payments that are made to a shareholder with respect to Shares purchased pursuant to the Offer, the shareholder is required to notify the Depositary of such shareholder's correct TIN by completing the form certifying that the TIN provided on the Substitute Form W-9 is correct. What Number to Give the Depositary The shareholder is required to give the Depositary the social security number or employer identification number of the record owner of the Shares. If the Shares are registered in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidelines on which number to report. 11 MANUALLY SIGNED FACSIMILE COPIES OF THE LETTER OF TRANSMITTAL, PROPERLY COMPLETED AND DULY EXECUTED, WILL BE ACCEPTED. THE LETTER OF TRANSMITTAL, CERTIFICATES FOR SHARES AND ANY OTHER REQUIRED DOCUMENTS SHOULD BE SENT OR DELIVERED BY EACH SHAREHOLDER OR SUCH SHAREHOLDER'S BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE TO THE DEPOSITARY AT ONE OF ITS ADDRESSES SET FORTH ON THE FIRST PAGE OF THIS LETTER OF TRANSMITTAL. Questions and requests for assistance may be directed to the Information Agent at the address and telephone numbers listed below. Additional copies of the Offer to Purchase, the Letter of Transmittal and other tender offer materials may be obtained from the Information Agent as set forth below, and will be promptly furnished at the Offeror's expense. You may also contact your broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Offer. The Information Agent for the Offer is: D.F. King & Co., Inc. 77 Water Street New York, New York 10005 Banks and Brokerage Firms Call: (212) 425-1685 All Others Call Toll Free: (800) 549-6697 The Dealer Manager for the Offer is: J.P. Morgan & Co. 60 Wall Street New York, New York 10260 Call Toll Free: (877) 639-5307 12 EX-99.(A)(3) 4 LETTER TO BROKERS Offer to Purchase for Cash All Outstanding Shares of Common Stock (Including the Associated Rights) of RECOVERY ENGINEERING, INC. at $35.25 Net Per Share by TENZING, INC. a direct wholly owned subsidiary of THE PROCTER & GAMBLE COMPANY THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, SEPTEMBER 29, 1999, UNLESS THE OFFER IS EXTENDED. To Brokers, Dealers, Commercial Banks, September 1, 1999 Trust Companies and Other Nominees: We are writing to you in connection with the offer by Tenzing, Inc., a Minnesota corporation (the "Offeror"), and a direct wholly owned subsidiary of The Procter & Gamble Company, an Ohio corporation ("Parent"), to purchase all outstanding shares of Common Stock, par value $0.01 per share (the "Common Stock"), including the associated stock purchase rights issued pursuant to the Rights Agreement, dated January 30, 1996, as amended, between the Company and Norwest Bank Minnesota, N.A., as Rights Agent (the "Rights" and, together with the Common Stock, the "Shares") of Recovery Engineering, Inc., a Minnesota corporation (the "Company"), at a purchase price of $35.25 per Share, net to the seller in cash, without interest, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated September 1, 1999 (the "Offer to Purchase") and in the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer") enclosed herewith. Offeror is a corporation, newly formed by Parent in connection with the Offer and the transactions contemplated thereby. The Offer is being made in connection with the Agreement and Plan of Merger dated as of August 26, 1999, by and among Parent, Offeror and the Company (the "Merger Agreement"). Holders of Shares whose certificates for such Shares (the "Certificates") are not immediately available or who cannot deliver their Certificates and all other required documents to ChaseMellon Shareholder Services, L.L.C. (the "Depositary") or complete the procedures for book-entry transfer prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase) must tender their Shares according to the guaranteed delivery procedures set forth in Section 3 of the Offer to Purchase. Please furnish copies of the enclosed materials to those of your clients for whose accounts you hold Shares in your name or in the name of your nominee. Enclosed herewith for your information and forwarding to your clients are copies of the following documents: 1. The Offer to Purchase, dated September 1, 1999. 2. The Letter of Transmittal to tender Shares for your use and for the information of your clients. Facsimile copies of the Letter of Transmittal may be used to tender Shares. 3. A letter to shareholders of the Company from Brian F. Sullivan, Chairman and Chief Executive Officer, together with a Solicitation/Recommendation Statement on Schedule 14D-9 filed with the Securities and Exchange Commission by the Company and mailed to the shareholders of the Company. 4. The Notice of Guaranteed Delivery for Tender of Shares to be used to accept the Offer if following the guaranteed delivery procedures set forth in Section 3 of the Offer to Purchase. 5. A printed form of letter which may be sent to your clients for whose accounts you hold Shares registered in your name, with space provided for obtaining such clients' instructions with regard to the Offer. 6. Guidelines of the Internal Revenue Service for Certification of Taxpayer Identification Number on Substitute Form W-9. YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, SEPTEMBER 29, 1999, UNLESS THE OFFER IS EXTENDED. Please note the following: 1. The tender price is $35.25 per Share, net to the seller in cash, without interest. 2. The Offer is conditioned upon, among other things, there being validly tendered and not withdrawn prior to the Expiration Date (as defined in the Offer to Purchase) of the Offer that number of Shares which would represent at least a majority of the outstanding Shares on a fully diluted basis. 3. The Offer is being made for all of the outstanding Shares. 4. Tendering shareholders will not be obligated to pay brokerage fees or commissions or, except as set forth in Instruction 6 of the Letter of Transmittal, stock transfer taxes on the transfer of Shares pursuant to the Offer. However, federal income tax backup withholding at a rate of 31% may be required, unless an exemption is available or unless the required taxpayer identification information is provided. See Important Tax Information of the Letter of Transmittal. 5. The Board of Directors of the Company has unanimously approved the Offer, the Merger (as defined in the Offer to Purchase) and the Merger Agreement and determined that the Merger is advisable and that the terms of the Offer and the Merger are fair to, and in the best interests of, the Company and the Company's shareholders, and recommends that the shareholders of the Company accept the Offer and approve the Merger and the Merger Agreement. 6. Notwithstanding any other provision of the Offer, payment for Shares accepted for payment pursuant to the Offer will in all cases be made only after timely receipt by the Depositary of (a) Certificates pursuant to the procedures set forth in Section 3 of the Offer to Purchase or a timely Book- Entry Confirmation (as defined in the Offer to Purchase) with respect to such Shares, (b) a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof) with any required signature guarantees or an Agent's Message (as defined in the Offer to Purchase) in connection with a book-entry delivery of Shares, and (c) any other documents required by the Letter of Transmittal. Accordingly, tendering stockholders may be paid at different times depending upon when Certificates for Shares or Book-Entry Confirmations (as defined in the Offer to Purchase) are actually received by the Depositary. If holders of Shares wish to tender, but it is impracticable for them to forward their Certificates or other required documents or complete the procedures for book-entry transfer prior to the Expiration Date, a tender may be effected by following the guaranteed delivery procedures specified in Section 3 of the Offer to Purchase. None of Offeror or Parent, or any officer, director, shareholder, agent or other representative of Offeror or Parent, will pay any fees or commissions to any broker, dealer or other person (other than the Depositary and the Information Agent as described in the Offer to Purchase) for soliciting tenders of Shares pursuant to the Offer. Offeror will, however, upon request, reimburse you for customary mailing and handling expenses incurred by 2 you in forwarding any of the enclosed materials to your clients. Offeror will pay or cause to be paid any transfer taxes payable on the transfer of Shares to it, except as otherwise provided in Instruction 6 of the Letter of Transmittal. Any inquiries you may have with respect to the Offer should be addressed to D.F. King & Co., Inc., the Information Agent for the Offer, at its address and telephone number set forth on the back cover of the Offer to Purchase. Additional copies of the enclosed materials may be obtained from the Information Agent or from brokers, dealers, commercial banks or trust companies. Very truly yours, THE PROCTER & GAMBLE COMPANY NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON THE AGENT OF PARENT, OFFEROR, THE DEPOSITARY, THE INFORMATION AGENT, OR ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENT OR USE ANY DOCUMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER, OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN. 3 EX-99.(A)(4) 5 LETTER TO CLIENTS Offer to Purchase for Cash All Outstanding Shares of Common Stock (Including the Associated Rights) of RECOVERY ENGINEERING, INC. at $35.25 Net Per Share by TENZING, INC. a direct wholly owned subsidiary of THE PROCTER & GAMBLE COMPANY THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, SEPTEMBER 29, 1999, UNLESS THE OFFER IS EXTENDED. To Our Clients: Enclosed for your consideration are the Offer to Purchase, dated September 1, 1999 (the "Offer to Purchase"), and the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer") relating to an offer by Tenzing, Inc., a Minnesota corporation ("Offeror") and a direct wholly owned subsidiary of The Procter & Gamble Company, an Ohio corporation ("Parent"), to purchase all outstanding shares of Common Stock, par value $0.01 per share (the "Common Stock"), including the associated stock purchase rights issued pursuant to the Rights Agreement, dated as of January 30, 1996, as amended, between the Company and Norwest Bank Minnesota, N.A., as Rights Agent (the "Rights" and, together with the Common Stock, the "Shares"), of Recovery Engineering, Inc., a Minnesota corporation (the "Company"), at a purchase price of $35.25 per Share, net to the seller in cash, without interest, upon the terms and subject to the conditions set forth in the Offer. The Offer is being made in connection with the Agreement and Plan of Merger dated as of August 26, 1999, by and among Parent, Offeror and the Company (the "Merger Agreement"). Offeror is a corporation, newly formed by Parent in connection with the Offer and the transactions contemplated thereby. This material is being forwarded to you as the beneficial owner of Shares carried by us in your account but not registered in your name. We are (or our nominee is) the holder of record of Shares held by us for your account. A tender of such Shares can be made only by us as the holder of record and pursuant to your instructions. The Letter of Transmittal is furnished to you for your information only and cannot be used by you to tender Shares held by us for your account. Accordingly, we request instructions as to whether you wish to have us tender any or all of the Shares held by us for your account pursuant to the terms and conditions set forth in the Offer. Please note the following: 1. The tender price is $35.25 per Share, net to the seller in cash, without interest. 2. The Offer is conditioned upon, among other things, there being validly tendered and not withdrawn prior to the Expiration Date (as defined in the Offer to Purchase) of the Offer that number of Shares which would represent at least a majority of the outstanding Shares on a fully diluted basis. 3. The Offer is being made for all of the outstanding Shares. 4. Tendering shareholders will not be obligated to pay brokerage fees or commissions or, except as set forth in Instruction 6 of the Letter of Transmittal, stock transfer taxes on the transfer of Shares pursuant to the Offer. However, federal income tax backup withholding at a rate of 31% may be required, unless an exemption is available or unless the required taxpayer identification information is provided. See Important Tax Information of the Letter of Transmittal. 5. The Board of Directors of the Company has unanimously approved the Offer, the Merger (as defined in the Offer to Purchase) and the Merger Agreement and determined that the Merger is advisable and that the terms of the Offer and the Merger are fair to, and in the best interests of, the Company and the Company's shareholders, and recommends that the shareholders of the Company accept the Offer and approve the Merger and the Merger Agreement. 6. Notwithstanding any other provision of the Offer, payment for Shares accepted for payment pursuant to the Offer will in all cases be made only after timely receipt by the Depositary of (a) Certificates pursuant to the procedures set forth in Section 3 of the Offer to Purchase or a timely Book- Entry Confirmation (as defined in the Offer to Purchase) with respect to such Shares, (b) a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof) with any required signature guarantees or an Agent's Message (as defined in the Offer to Purchase) in connection with a book-entry delivery of Shares, and (c) any other documents required by the Letter of Transmittal. Accordingly, tendering shareholders may be paid at different times depending upon when Certificates for Shares or Book-Entry Confirmations are actually received by the Depositary. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, SEPTEMBER 29, 1999, UNLESS THE OFFER IS EXTENDED. If you wish to have us tender any or all of the Shares held by us for your account, please so instruct us by completing, executing, detaching and returning to us the instruction form set forth below. If you authorize the tender of your Shares, all such Shares will be tendered unless otherwise indicated in such instruction form. An envelope to return your instruction to us is enclosed. Please forward your instructions to us as soon as possible to allow us ample time to tender your Shares on your behalf prior to the expiration of the Offer. The Offer is not being made to, nor will tenders be accepted from or on behalf of, holders of Shares residing in any jurisdiction in which the making of the Offer or acceptance thereof would not be in compliance with the laws of such jurisdiction. However, Offeror may, in its discretion, take such action as it may deem necessary to make the Offer in any jurisdiction and extend the Offer to holders of Shares in such jurisdiction. If the securities laws of any jurisdiction require the Offer to be made by a licensed broker or dealer, the Offer will be deemed to be made on behalf of Offeror by J.P. Morgan Securities Inc., the Dealer Manager for the Offer, or one or more registered brokers or dealers licensed under the laws of such jurisdiction. 2 INSTRUCTIONS WITH RESPECT TO THE OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK (INCLUDING THE ASSOCIATED RIGHTS) OF RECOVERY ENGINEERING, INC. The undersigned acknowledge(s) receipt of your letter and the enclosed Offer to Purchase, dated September 1, 1999 (the "Offer to Purchase"), and the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer") in connection with the offer by Tenzing, Inc., a Minnesota corporation ("Offeror") and a direct wholly owned subsidiary of The Procter & Gamble Company, an Ohio corporation ("Parent"), to purchase all outstanding shares of Common Stock, par value $0.01 per share (the "Common Stock"), including the associated stock purchase rights issued pursuant to the Rights Agreement dated as of January 30, 1996, as amended, between the Company and Norwest Bank Minnesota, N.A., as Rights Agent (the "Rights" and, together with the Common Stock, the "Shares"), of Recovery Engineering, Inc., a Minnesota corporation (the "Company"), at a purchase price of $35.25 per Share, net to the seller in cash, without interest, upon the terms and subject to the conditions set forth in the Offer. Offeror has been formed by Parent in connection with the Offer and the transactions contemplated thereby. The Offer is being made in connection with the Agreement and Plan of Merger dated as of August 26, 1999, by and among Parent, Offeror and the Company (the "Merger Agreement"). This will instruct you to tender to Parent the number of Shares indicated below (or if no number is indicated below, all Shares) which are held by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Offer. Number of Shares to be Tendered:*_______________ SIGN HERE Account Number: _____________________ ------------------------------------- Date: _________________________, 1999 ------------------------------------- Signature(s) ------------------------------------- ------------------------------------- (Print Name(s)) ------------------------------------- ------------------------------------- (Print Address(es)) ------------------------------------- (Area Code and Telephone Number(s)) ------------------------------------- (Taxpayer Identification or Social Security Number(s)) - -------- * Unless otherwise indicated, it will be assumed that all Shares held by us for your account are to be tendered. 3 EX-99.(A)(5) 6 NOTICE OF GUARANTEED DELIVERY NOTICE OF GUARANTEED DELIVERY for Tender of Shares of Common Stock (Including the Associated Rights) of RECOVERY ENGINEERING, INC. This form, or one substantially equivalent hereto, must be used to accept the Offer (as defined below) if certificates for shares of Common Stock, par value $0.01 per share (the "Common Stock"), including the associated stock purchase rights issued pursuant to the Rights Agreement, dated January 30, 1996, as amended, between the Company and Norwest Bank Minnesota, N.A., as Rights Agent (the "Rights" and, together with the Common Stock, the "Shares"), of Recovery Engineering, Inc., a Minnesota corporation (the "Company"), are not immediately available or the procedure for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach the Depositary prior to the Expiration Date (as defined in the Offer to Purchase). This Notice of Guaranteed Delivery may be delivered by hand or facsimile transmission or mailed to the Depositary. See Section 3 of the Offer to Purchase, dated September 1, 1999 (the "Offer to Purchase"). The Depositary for the Offer is: ChaseMellon Shareholder Services, L.L.C. By Mail: By Hand in New York: By Hand/Overnight Courier: Reorganization Department Reorganization DepartmentReorganization Department PO Box 3301 120 Broadway 85 Challenger Road South Hackensack, NJ 07606 13th Floor Mail Stop-Reorg New York, NY 10271 Ridgefield Park, NJ 07660 Facsimile Copy Number (for eligible institutions only): (201) 296-4293 For Confirmation Telephone: (201) 296-4860 The Information Agent for the Offer is: D.F. King & Co., Inc. 77 Water Street New York, New York 10005 Banks and Brokerage Firms Call Collect: (212) 425-1685 All Others Call Toll Free: (800) 549-6697 --------------- Delivery of this Notice of Guaranteed Delivery to an address, or transmission of instruments via facsimile transmission, other than as set forth above, does not constitute a valid delivery. This Notice of Guaranteed Delivery is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. The Eligible Institution that completes this form must communicate the guarantee to the Depositary and must deliver the Letter of Transmittal or an Agent's Message (as defined in the Offer to Purchase) and certificates for Shares to the Depositary within the time period shown herein. Failure to do so could result in a financial loss to such Eligible Institution. THE GUARANTEE ON THE REVERSE SIDE MUST BE COMPLETED. Ladies and Gentlemen: The undersigned hereby tenders to Tenzing, Inc. ("Offeror"), a Minnesota corporation, and a direct wholly owned subsidiary of The Procter & Gamble Company ("Parent"), an Ohio corporation, upon the terms and subject to the conditions set forth in the Offer to Purchase and in the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer"), receipt of each of which is hereby acknowledged, the number of Shares indicated below, pursuant to the guaranteed delivery procedure set forth in Section 3 of the Offer to Purchase. Offeror is a corporation, newly formed by Parent in connection with the Offer and the transactions contemplated thereby. Number of Shares: ___________________ SIGN HERE Certificate No(s). (if available): Name(s) of Record Holder(s): _____________________________________ _______________________________________ _____________________________________ _______________________________________ (Please Type or Print) If Shares will be tendered by book-entry transfer: Name of Tendering Institutions Addresses: ____________________________ (Include a Zip Code) _____________________________________ Area Code and Telephone No.: Account No.: ________________________ _______________________________________ Signature(s): _________________________ Dated:___________________________, 1999 THE GUARANTEE SET FORTH BELOW MUST BE COMPLETED GUARANTEE (Not to be used for signature guarantee) The undersigned, as Eligible Institution (as such term is defined in Section 3 of the Offer to Purchase), hereby guarantees to deliver to the Depositary the certificates representing the Shares tendered hereby, in proper form for transfer, or a Book-Entry Confirmation (as defined in Section 2 of the Offer to Purchase) with respect to transfer of such Shares into the Depositary's account at The Depository Trust Company or the Philadelphia Depository Trust Company, in each case, together with a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof) with any required signature guarantees or an Agent's Message (as defined in the Offer to Purchase) in the case of a book-entry delivery of Shares, and any other documents required by the Letter of Transmittal, all within three NASDAQ National Market trading days after the date hereof. Name of Firm: _______________________ ________________________________________ (Authorized Signature) Address: ____________________________ Name: _________________________________ _____________________________________ Title: ________________________________ _____________________________________ (Include a Zip Code) Date: _________________________________ Area Code and Tel. No.: _____________ DO NOT SEND CERTIFICATES FOR SHARES AND/OR RIGHTS WITH THIS NOTICE OF GUARANTEED DELIVERY. CERTIFICATES SHOULD BE SENT TOGETHER WITH A LETTER OF TRANSMITTAL. EX-99.(A)(6) 7 GUIDELINES ON SUBSTITUTE FORM W-9 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 Guidelines for Determining the Proper Identification Number to Give the Pay- er--Social Security numbers have nine digits separated by two hyphens: i.e., 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e., 00-0000000. The table below will help determine the number to give the Payer. - ----------------------------------------------- Give the For this type of SOCIAL SECURITY account: number of-- - ----------------------------------------------- 1. An individual's The individual account 2. Two or more The actual owner of the individuals (joint account or, if combined account) funds, the first individual on the account(1) 3. Husband and wife The actual owner of the (joint account) account or, if joint funds, the first individual on the account(1) 4. Custodian account The minor(2) of a minor (Uniform Gift to Minors Act) 5. Adult and minor The adult, or if the (joint account) minor is the only contributor, the minor(1) 6. Account in the name The ward, minor or of guardian or incompetent person(3) committee for a designated ward, minor or incompetent person 7. a. A revocable The grantor-trustee(1) savings trust account (in which grantor is also trustee) b. Any "trust" The actual owner(4) account that is not a legal or valid trust under State law - ----------------------------------------------- Give the EMPLOYER For this type of account: IDENTIFICATION number of-- - ----------------------------------------------- 8. Sole proprietorship The owner(4) account 9. A valid trust, estate The legal entity (Do or pension trust not furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(5) 10. Corporate account The corporation 11. Religious, charitable The organization or educational organization account 12. Partnership account The partnership held in the name of the business 13. Association, club or The organization other tax-exempt organization 14. A broker or registered The broker or nominee nominee 15. Account with the The public entity Department of Agriculture in the name of a public entity (such as a State or local governmental school district or prison) that receives agricultural program payments - --------------------------------------- --------------------------------------- (1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's social security number. (4) Show the name of the owner. (5) List first and circle the name of the legal trust, estate or pension trust. NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 Page 2 Obtaining a Number If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Card, or Form SS- 4, Application for Employer Identification Number (for businesses and all other entities), or Form W-7 for Individual Taxpayer Identification Number (for alien individuals required to file U.S. tax returns), at an office of the Social Security Administration or the Internal Revenue Service. Payees Exempt from Backup Withholding Payees specifically exempted from backup withholding on all payments include the following: . A corporation. . A financial institution. . An organization exempt from tax under section 501(a), or an individual retirement plan, or a custodial account under Section 403(b)(7). . The United States or any agency or instrumentality thereof. . A State, the District of Columbia, a possession of the United States, or any political subdivision or instrumentality thereof. . A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. . An international organization or any agency or instrumentality thereof. . A registered dealer in securities or commodities registered in the U.S. or a possession of the U.S. . A real estate investment trust. . A common trust fund operated by a bank under section 584(a). . An entity registered at all times during the tax year under the Investment Company Act of 1940. . A foreign central bank of issue. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: . Payments to nonresident aliens subject to withholding under section 1441. . Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. . Payments of patronage dividends where the amount received is not paid in money. . Payments made by certain foreign organizations. . Payments made to a nominee. Payments of interest not generally subject to backup withholding include the following: . Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. . Payments of tax-exempt interest (including exempt-interest dividends under section 852). . Payments described in section 6049(b)(5) to nonresident aliens. . Payments on tax-free covenant bonds under section 1451. . Payments made by certain foreign organizations. . Payments made to a nominee. Exempt payees described above should file a Substitute Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. Certain payments other than interest, dividends and patronage dividends that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6045, and 6050A. Privacy Act Notice.--Section 6109 requires most recipients of dividend, interest or other payments to give taxpayer identification numbers to payers who must report the payments to the IRS. The IRS uses the numbers for identification purposes and to help verify the accuracy of your tax return. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold 31% of taxable interest, dividend and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. Penalties (1) Penalty for Failure to Furnish Taxpayer Identification Number.--If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) Civil Penalty for False Information With Respect to Withholding.--If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (3) Criminal Penalty for Falsifying Information.--Falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. EX-99.(A)(7) 8 SUMMARY ANNOUNCEMENT This announcement is neither an offer to purchase nor a solicitation of an offer to sell shares. The Offer is made solely by the Offer to Purchase, dated September 1, 1999, and the related Letter of Transmittal, and is not being made to, and tenders will not be accepted from, or on behalf of, holders of Shares in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. If the securities laws of any jurisdiction require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of Offeror by J.P. Morgan Securities Inc., the Dealer Manager for the Offer, or one or more registered brokers or dealers licensed under the laws of such jurisdiction. Notice of Offer to Purchase All Outstanding Shares of Common Stock (Including the Associated Rights) of Recovery Engineering, Inc. at $35.25 Net Per Share In Cash by TENZING, INC. a direct wholly owned subsidiary of THE PROCTER & GAMBLE COMPANY Tenzing, Inc., a Minnesota corporation ("Offeror"), and a direct wholly owned subsidiary of The Procter & Gamble Company, an Ohio corporation ("Parent"), is offering to purchase all outstanding shares of Common Stock, par value $0.01 per share ("Common Stock"), of Recovery Engineering, Inc., a Minnesota corporation (the "Company"), including the associated stock purchase rights (the "Rights") issued pursuant to the Rights Agreement, dated as of January 30, 1996, between the Company and Norwest Bank Minnesota N.A., as Rights Agent ("Rights" and, together with the shares of Common Stock, "Shares"), at a purchase price of $35.25 per share, net to the seller in cash, without interest (the "Offer Price"), upon the terms and subject to the conditions set forth in the Offer to Purchase, dated September 1, 1999, and in the related Letter of Transmittal (which, together with any amendments or supplements hereto or thereto, collectively constitute the "Offer"). See the Offer to Purchase for capitalized terms used but not defined herein. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, SEPTEMBER 29, 1999, UNLESS THE OFFER IS EXTENDED. The Offer is conditioned upon, among other things, (i) there being validly tendered and not withdrawn prior to the Expiration Date (as defined below) Shares representing not less than a majority of the Shares then outstanding on a fully diluted basis on the date of purchase (the "Minimum Condition") and (ii) the expiration or termination of any applicable waiting periods imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. See Sections 12 and 14 of the Offer to Purchase. The Offer is not conditioned on obtaining financing. The Offer is being made pursuant to the Agreement and Plan of Merger, dated as of August 26, 1999 (the "Merger Agreement"), by and among Parent, Offeror and the Company. The Merger Agreement provides, among other things, for the commencement of the Offer by Offeror and further provides that, after the purchase of the Shares pursuant to the Offer and subject to the satisfaction or waiver of certain conditions set forth therein, Offeror will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a direct wholly owned subsidiary of Parent. Pursuant to the Merger, each outstanding Share (other than (i) Shares owned by the Company or any direct or indirect subsidiary of the Company or owned by Parent or Offeror or any other direct or indirect subsidiary of Parent, and (ii) Shares held by holders who have properly exercised their appraisal rights under the Minnesota Business Corporation Act) immediately prior to the Effective Time (as defined in the Merger Agreement), will be converted into the right to receive the Offer Price, in cash, without interest thereon, less any required withholding of taxes, upon the surrender of certificates formerly representing such Shares. The Board of Directors of the Company has unanimously approved the Offer and the Merger and determined that the Offer and the Merger are fair to and in the best interests of the Company and the holders of Shares (the "stockholders") and has unanimously recommended that the stockholders accept the Offer and tender their Shares. For purposes of the Offer, Offeror will be deemed to have accepted for payment (and thereby purchased) Shares validly tendered to Offeror and not withdrawn on or prior to the Expiration Date if, as and when Offeror gives oral or written notice to Chase Mellon Shareholder Services, L.L.C. (the "Depositary") of Offeror's acceptance for payment of such Shares. Upon the terms and subject to the conditions of the Offer, payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for tendering stockholders for the purpose of receiving payment from Offeror and transmitting payments to tendering stockholders. The term "Expiration Date" means 12:00 midnight, New York City time, on Wednesday, September 29, 1999, unless and until Offeror, in accordance with the terms of the Offer and the Merger Agreement, extends the period of time during which the Offer is open, in which event the term "Expiration Date" means the latest time and date at which the Offer, as so extended, expires. In the Merger Agreement, Offeror has agreed that if any condition to the Offer is not satisfied at the scheduled expiration of the Offer but is reasonably capable of being satisfied within three business days thereof, Offeror shall, and Parent shall cause Offeror to, extend the Offer for three business days and Parent and the Company shall each use reasonable efforts to cause such condition to become satisfied during such three business day period. In addition, Offeror has agreed that, without the prior written consent of the Company, it will not, extend the period during which the Offer is open if all of the conditions to the Offer have been satisfied, except that Offeror may, in its reasonable discretion, extend the Offer (i) if on the scheduled Expiration Date of the Offer any of the conditions to the Offer shall not have been satisfied or waived, (ii) for such period as may be required by any rule, regulation, interpretation or position of the Securities and Exchange Commission (the "Commission") or its staff applicable to the Offer, (iii) for any period required by applicable law in connection with an increase in the consideration to be paid pursuant to the Offer, (iv) or if all conditions to the Offer are satisfied or waived but the number of Shares tendered is 80% or more, but less than 90%, of the then outstanding Shares, for an aggregate period of not more than ten business days (for all such extensions under this clause (iv)) beyond the latest expiration date that would be permitted under clause (i), (ii) or (iii) of this sentence. There can be no assurance that Offeror will exercise its right to extend the Offer. Offeror reserves the right (but shall not be obligated), in accordance with applicable rules and regulations of the Commission, to waive any condition (other than the Minimum Condition) to the Offer. If the Minimum Condition, or any of the other conditions set forth in Section 14 of the Offer to Purchase, has not been satisfied by 12:00 midnight, New York City time, on Wednesday, September 29, 1999 (or any other time then set as the Expiration Date), Offeror may elect to, subject to the terms and conditions contained in the Merger Agreement and to the applicable rules and regulations of the Commission (i) terminate the Offer and not accept for payment any Shares and return all tendered Shares to tendering stockholders, (ii) waive all the unsatisfied conditions and, subject to complying with the terms of the Merger Agreement and the applicable rules and regulations of the Commission, accept for payment and pay for all Shares validly tendered prior to the Expiration Date and not theretofore withdrawn, (iii) extend the Offer and, subject to the right of stockholders to withdraw Shares until the Expiration Date, retain the Shares that have been tendered during the period or periods for which the Offer is extended or (iv) amend the Offer. Except as set forth above, and subject to the applicable rules and regulations of the Commission, Offeror expressly reserves the right, in its sole discretion, to amend the Offer in any respect. Any extension of the period during which the Offer is open, any waiver of the conditions to the Offer, any delay in acceptance for payment, or termination or amendment of the Offer, will be followed, as promptly as practicable, by public announcement thereof, such announcement in the case of an extension to be issued not later than 9:00 a.m. New York City time, on the next business day after the previously scheduled Expiration Date in accordance with the public announcement requirements of Rule 14d-4(c) under the Securities Exchange Act of 1934, as amended ("Exchange Act"). The reservation by Offeror of the right to delay acceptance for payment of, or payment for, Shares is subject to the provisions of Rule 14e-l(c) under the Exchange Act, which requires that Offeror pay consideration offered or return the Shares deposited by or on behalf of stockholders promptly after the termination or withdrawal of the Offer. Offeror shall not have any obligation to pay interest on the purchase price for tendered Shares whether or not Offeror exercises its right to extend the Offer. Tenders of Shares made pursuant to the Offer are irrevocable, except as otherwise provided in Section 4 of the Offer to Purchase. Shares tendered pursuant to the Offer may be withdrawn pursuant to the procedures set forth in Section 4 of the Offer to Purchase at any time prior to the Expiration Date and, unless theretofore accepted for payment and paid for by Offeror pursuant to the Offer, may also be withdrawn at any time after October 30, 1999. For a withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of the Offer to Purchase. Any such notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder, if different from that of the person who tendered such Shares. If certificates evidencing Shares to be withdrawn have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such certificates, the tendering stockholder must also submit to the Depositary the serial numbers shown on the particular certificates evidencing the Shares to be withdrawn, and the signature on the notice of withdrawal must be guaranteed by an Eligible Institution (as defined below), except in the case of Shares tendered for the account of an Eligible Institution. If Shares have been tendered pursuant to the procedure for book-entry transfer set forth in Section 3 of the Offer to Purchase, the notice of withdrawal must also specify the name and number of the account at the applicable Book-Entry Transfer Facility to be credited with the withdrawn Shares and otherwise comply with such Book-Entry Transfer Facility's procedures. An "Eligible Institution" is a bank, broker, dealer, credit union, savings association or other entity that is a member in good standing of a recognized Medallion Program approved by The Securities Transfer Association, Inc. The information required to be disclosed by Rule 14d-6(e)(1)(VII) of the General Rules and Regulations under the Exchange Act is contained in the Offer to Purchase and is incorporated herein by reference. The Company has provided Offeror with its stockholder list and security position listings for the purpose of disseminating the Offer to stockholders. The Offer to Purchase, the related Letter of Transmittal and other relevant materials will be mailed to record holders of Shares and will be furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the Company's stockholder list, or, if applicable, who are listed as participants in a clearing agency's security position listing for subsequent transmittal to beneficial owners of Shares. Stockholders are urged to read the Offer to Purchase and the related Letter of Transmittal carefully before deciding whether to tender their Shares pursuant to the Offer. Questions and requests for assistance or for copies of the Offer to Purchase, the related Letter of Transmittal, the Notice of Guaranteed Delivery or other related materials may be directed to the Information Agent or the Dealer Manager at their respective addresses and telephone numbers set forth below, and copies will be furnished promptly at Offeror's expense. Holders of Shares may also contact brokers, dealers, commercial bankers and trust companies for additional copies of the Offer to Purchase, the related Letter of Transmittal, the Notice of Guaranteed Delivery or other related materials. The Information Agent for the Offer is: D.F. King & Co., Inc. 77 Water Street New York, New York 10005 Banks and Brokers Call Collect: (212) 425-1685 All Others Call Toll Free: (800) 549-6697 The Dealer Manager for the Offer is: J.P. MORGAN SECURITIES INC. 60 Wall Street New York, New York 10260 Call Toll Free: (877)639-5307 September 1, 1999 EX-99.(A)(8) 9 JOINT PRESS RELEASE P&G to Tender for Recovery Engineering Aug. 26 The Procter & Gamble Company (NYSE: PG) and Recovery Engineering, Inc. (Nasdaq: REIN), the manufacturer of PUR household drinking water systems and filters, today announced that they have entered into a definitive agreement for P&G to acquire Recovery Engineering through a cash tender offer. The tender offer will begin within five business days at a price of $35.25 per share in cash for all of the shares of Recovery Engineering, for a total enterprise value of approximately $265 million. It is expected to be completed by early October 1999. The tender offer, which has been approved by the boards of directors of both companies, is subject to the tender of a majority of the outstanding Recovery Engineering shares, the expiration of any relevant waiting periods, and other customary conditions. Recovery Engineering is one of the world's leading manufacturers of consumer drinking water systems, which are sold under the PUR brand name. The company's focus on research has yielded proprietary, advanced water filtration technologies. This has led to the introduction of innovative water filters that provide safe and simple protection from unhealthy drinking water, both at home and outdoors. The company entered the household water filtration market in 1995, has grown volume and share dramatically and is now a market leader. "Recovery Engineering is in the forefront of the fast-growing market for home water filtration systems," said Durk I. Jager, president and chief executive of Procter & Gamble. "Their superior technologies provide a terrific opportunity for P&G to improve the lives of the world's consumers." "P&G has the global distribution reach and a proven ability to develop and market global brands which can establish PUR as a world leader in household water filtration," said Brian F. Sullivan, chairman and CEO of Recovery Engineering. "The board of directors of Recovery Engineering believes that this transaction is in the best interests of Recovery Engineering's shareholders and employees, and unanimously recommends that all shareholders tender their shares to P&G." J.P. Morgan & Co. Incorporated served as financial advisor to Procter & Gamble in this transaction. Goldman Sachs & Company acted as financial advisor to Recovery Engineering. Procter & Gamble markets more than 300 brands to nearly five billion people in more than 140 countries. These brands include Tide(R), Crest(R), Pantene Pro-V(R), Pampers(R), Pepto-Bismol(R) and Safeguard(R). P&G has on-the-ground operations in 70 countries and employs more than 110,000 people. For fiscal 1998-99, P&G's sales were $38 billion. Recovery Engineering is one of the world's leading manufacturers of consumer drinking water systems. Sold under the PUR brand name, Recovery Engineering markets household, recreational and marine drinking water products through more than 35,000 retail outlets in North America and through international distributors. Founded in 1986 and based in Minneapolis, Minnesota, the company went public in 1993 at a share price of $7. It is committed to improving the world's drinking water through technological innovation. The news release (as well as oral statements or other written statements made or to be made by Recovery Engineering) contains statements relating to future events or the future financial performance of Recovery Engineering which are forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements involve risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, actual results may differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to, the effects of economic conditions, product demand, competitive products, and other factors described from time to time in Procter & Gamble's and Recovery Engineering's Annual reports, respectively, on Form 10K and certain registration statements of Procter & Gamble and Recovery Engineering. EX-99.(A)(9) 10 PRESS RELEASE ISSUED BY PARENT The Procter & Gamble Company Commences Tender Offer to Purchase All - ------------------------------------------------------------------- Outstanding Shares of Recovery Engineering Common Stock at $35.25 per Share - --------------------------------------------------------------------------- Cincinnati, Ohio, September 1 - The Procter & Gamble Company ("Procter & Gamble") (NYSE: PG) announced today that a wholly owned subsidiary of Procter & Gamble has commenced a cash tender offer to purchase all outstanding shares of common stock, par value $0.01 per share (the "Common Stock"), of Recovery Engineering, Inc. ("REI") (Nasdaq: REIN) at a price of $35.25 per share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase and related Letter of Transmittal both dated today. The offer is being made pursuant to the previously announced Merger Agreement between Procter & Gamble and REI and is conditioned upon the tender of that number of shares of Common Stock of REI equivalent to a majority of the total issued and outstanding shares of such Common Stock on a fully diluted basis and certain other customary conditions. REI's Board of Directors unanimously approved the tender offer and Merger Agreement and recommends that REI shareholders tender their shares of Common Stock pursuant to the offer. The offer and withdrawal rights are scheduled to expire at 12:00 midnight, New York City time on Wednesday September 29, 1999, unless the offer is otherwise extended in accordance with the terms of the Merger Agreement. J.P. Morgan Securities Inc. is acting as the Dealer Manager and D.F. King & Co., Inc. is acting as the Information Agent in connection with the tender offer. Procter & Gamble markets more than 300 brands to nearly five billion people in more than 140 countries. These brands include Tide/(R)/, Crest/(R)/, Pantene Pro-V/(R)/, Pampers/(R)/, Pepto-Bismol/(R)/, and Safeguard/(R)/. Procter & Gamble has on-the-ground operations in 70 countries and employs more than 110,000 people. For fiscal 1998-99, Procter & Gamble's sales were $38 billion. Recovery Engineering, Inc. is one of the world's leading manufacturers of consumer drinking water systems. Sold under the PUR/(R)/ brand name, the Company markets household, recreational and marine water products through more than 35,000 retail outlets in North America and through international distributors. Founded in 1986 and based in Minneapolis, Minn., the Company is committed to improving the world's drinking water through technological innovation. This press release is neither an offer to purchase nor a solicitation of an offer to sell shares. The tender offer is made solely by the Offer to Purchase and the related Letter of Transmittal and is not being made to, and tenders be accepted from, or on behalf of, holders of Common Stock in any jurisdiction in which the making of the offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. If the securities laws of any jurisdiction require the offer to be made by a licensed broker or dealer, the offer shall be deemed to be made on behalf of Procter & Gamble by J.P. Morgan Securities Inc., the Dealer Manager for the offer, or one or more Registered brokers or dealers licensed under the laws of such jurisdiction. Additional copies of such documents can be obtained by contacting J.P. Morgan Securities Inc., the Dealer Manager, at 877-639-5307 (toll free) or D.F. King & Co., Inc. the Information Agent, at 800-549-6697 (toll free). EX-99.(C)(1) 11 AGREEMENT AND PLAN OF MERGER DATED AS OF 8/26/1999 AGREEMENT AND PLAN OF MERGER dated as of August 26, 1999 by and among RECOVERY ENGINEERING, INC., THE PROCTER AND GAMBLE COMPANY and TENZING, INC. TABLE OF CONTENTS -----------------
Page ARTICLE I THE OFFER SECTION 1.1. The Offer 2 SECTION 1.2. Actions by the Parent and Merger Sub 3 SECTION 1.3. Actions by the Company 3 SECTION 1.4. Directors 5 ARTICLE II THE MERGER SECTION 2.1. The Merger 6 SECTION 2.2. Effective Time of the Merger 6 SECTION 2.3. Closing 6 SECTION 2.4. Effects of the Merger 7 SECTION 2.5. Articles of Incorporation and Bylaws 7 SECTION 2.6. Directors 7 SECTION 2.7. Officers 7 ARTICLE III CONVERSION OF SHARES SECTION 3.1. Conversion of Capital Stock 7 SECTION 3.2. Exchange of Certificates 9 SECTION 3.3. Adjustments to Prevent Dilution 10 SECTION 3.4. Dissenting Shares 11 SECTION 3.5. Merger Without Meeting of Shareholders 11 ARTICLE IV REPRESENTATIONS AND WARRANTEES OF THE COMPANY SECTION 4.1. Organization and Qualifications; Subsidiaries 11 SECTION 4.2. Articles of Incorporation and Bylaws 12 SECTION 4.3. Capitalization 12 SECTION 4.4. Authority Relative to This Agreement 14 SECTION 4.5. No Conflict; Required Filings and Consents; Certain Contracts 14 SECTION 4.6. Compliance 15 SECTION 4.7. SEC Reports and Financial Statements 15 SECTION 4.8. Absence of Certain Changes or Events 16 SECTION 4.9. Litigation 16 SECTION 4.10. Information Statement 16 SECTION 4.11. Employee Benefit Plans 17 SECTION 4.12. Labor and Employment Matters 18 SECTION 4.13. Vote Required 18 SECTION 4.14. Opinion of Financial Advisor 19 SECTION 4.15. Brokers 19 SECTION 4.16. Taxes 19 SECTION 4.17. Licenses and Permits 20 SECTION 4.18. Title to Assets 21
SECTION 4.19. Material Contracts 21 SECTION 4.20. Intellectual Property Rights 22 SECTION 4.21. State Takeover Statutes Inapplicable 23 SECTION 4.22. Rights Agreement 23 SECTION 4.23. Year 2000 23 SECTION 4.24. Insurance 24 SECTION 4.25. Environmental Matters 24 ARTICLE V REPRESENTATIONS AND WARRANTEES OF THE PARENT AND MERGER SUB SECTION 5.1. Organization and Qualifications; Subsidiaries 26 SECTION 5.2. Certificate of Incorporation and Bylaws 26 SECTION 5.3. Authority Relative to This Agreement 26 SECTION 5.4. No Conflict 27 SECTION 5.5. Offer Documents 27 SECTION 5.6. Board Approval 27 SECTION 5.7. Vote Required 28 SECTION 5.8. No Arrangements Triggering Section 302A.673 of the MBCA 28 SECTION 5.9. Merger Sub 28 SECTION 5.10. Financing 28 ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER SECTION 6.1. Conduct of Business of the Company Pending the Merger 28 ARTICLE VII ADDITIONAL COVENANTS SECTION 7.1. Access to Information 31 SECTION 7.2. No Solicitation 31 SECTION 7.3. Directors and Officers Indemnification and Insurance 33 SECTION 7.4. Notification of Certain Matters 35 SECTION 7.5. Restructuring of Merger 35 SECTION 7.6. Company Shareholder Meeting 35 SECTION 7.7. Proxy Statements 35 SECTION 7.8. Further Action, Reasonable Efforts 36 SECTION 7.9. Public Announcements 37 SECTION 7.10. Employee Benefits 37 SECTION 7.11. Confidentiality Agreement 38 ARTICLE VIII CONDITIONS TO THE MERGER SECTION 8.1. Conditions to Each Party's Obligation to Effect the Merger 39 SECTION 8.2. Conditions to Obligations of the Company to Effect the Merger 39 SECTION 8.3. Conditions to Obligations of the Parent and Merger Sub to Effect the Merger 39 ARTICLE IX
TERMINATION WAIVER, AMENDMENT AND CLOSING SECTION 9.1. Termination 40 SECTION 9.2. Effect of Termination 41 SECTION 9.3. Termination Fee 41 SECTION 9.4. Amendment or Supplement 42 SECTION 9.5. Extension of Time, Waiver, Etc 42 ARTICLE X MISCELLANEOUS SECTION 10.1. No Survival of Representations and Warranties 42 SECTION 10.2. Expenses 42 SECTION 10.3. Counterparts 43 SECTION 10.4. Governing Law 43 SECTION 10.5. Notices 43 SECTION 10.6. Miscellaneous 44 SECTION 10.7. Severability 44 SECTION 10.8. Enforcement of Agreement 44
EXHIBIT A - CONDITIONS OF THE OFFER LIST OF DEFINED TERMS Section Where Defined Action Section 7.3 Acquisition Proposal Section 7.2 Agreement Introduction Ancillary Documents Section 4.4 Articles of Merger Section 2.2 Audit Section 4.16 Benefit Plans Section 4.11 Blue Sky Laws Section 4.5 Board Section 1.3 Board of Directors Section 1.3 Cap Section 4.11 Certificates Section 3.1 Claim Section 7.3 Closing Section 2.3 Closing Date Section 2.3 Code Section 4.11 Company Introduction Company Benefit Plans Section 4.11 Company Common Stock Section 1.1 Company Disclosure Letter Section 4.3 Company ESPP Section 3.2 Company Material Adverse Effect Section 4.1 Company Meeting Section 6.6 Company Option Plans Section 4.3 Company Performance Component Section 7.10 Company Preferred Stock Section 4.3 Company SEC Reports Section 4.7 Company Shares Trust Section 2.2 Company Stock Options Section 4.3 Confidentiality Agreement Section 7.1 Continuing Directors Section 1.3 Contracts Section 4.5 Convertible Notes Preambles Covered Person Section 7.3 Current Plan Section 7.10 Derivative Section 4.19 Dissenting Shares Section 3.4 Effective Time Section 2.2 Environmental Costs Section 4.25 Environment Laws Section 4.25 ERISA Section 4.11 Excess Shares Section 2.2 Exchange Act Section 1.1 Exchange Fund Section 3.2 Excluded Options Section 3.1 Fairness Opinion Section 1.3 Financial Advisor Section 1.3 Governmental Entity Section 4.5 Hazardous Substances Section 4.25 HSR Act Section 4.5 Indemnified Party Section 7.3 Information Statement Section 4.10 Intellectual Property Rights Section 4.20 Laws Section 4.5 Liens Section 4.3 Litigation Section 4.9 Losses Section 7.3 Material Contracts Section 4.19 Maximum Premium Section 7.3 MBCA Section 1.3 Merger Section 2.1 Merger Consideration Section 1.1 Merger Filing Section 2.2 Merger Sub Introduction Minimum Condition Exhibit A Offer Section 1.1 Offer Documents Section 1.2 Option Agreement Preambles Options Section 4.3 Parent Introduction Parent Material Adverse Effect Section 5.1 Parent Plan Section 7.10 Paying Agent Section 3.2 Percentage Section 1.4 Permits Section 4.17 Plan Options Section 4.3 Proxy Statement Section 7.7 REI Barbados Section 4.1 Representatives Section 7.1 Required Company Vote Section 4.13 Rights Section 4.3 Rights Amendment Section 4.22 Rights Agreement Section 1.3 Schedule 14D-9 Section 1.3 SEC Section 1.1 Securities Act Section 4.7 Shareholders Meeting Section 7.6 Stock Purchase Date Section 3.2 Subsidiary Section 4.1 Superior Proposal Section 7.2 Surviving Corporation Section 2.1 Systems Section 4.23 Taxes Section 4.16 Tax Authority Section 4.16 Tax Returns Section 4.16 Tender and Option Agreement Preambles Termination Fee Section 9.4 Third Party Options Section 4.3 Transactions Section 4.4 Warrant Section 3.3 Year 2000 Compliant Section 4.23 1999 Balance Sheet Section 4.18 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER is dated as of August 26, 1999 (this "Agreement"), by and among The Procter and Gamble Company, an Ohio corporation (the "Parent"), Recovery Engineering, Inc., a Minnesota corporation (the "Company"), and Tenzing, Inc., a Minnesota corporation and a wholly owned subsidiary of the Parent ("Merger Sub"). WHEREAS, the Boards of Directors of the Parent and the Company each have determined that it is in the best interests of their respective companies and shareholders for the Parent to acquire the Company upon the terms and subject to the conditions set forth herein; WHEREAS, simultaneously with the execution and delivery of this Agreement, the Company has entered into an agreement (the "Option Agreement ") with the Parent and Merger Sub pursuant to which the Company has granted to Merger Sub an unconditional, irrevocable option to purchase up to 1,202,875 newly-issued shares of Company Common Stock (defined terms used herein not previously defined having the meanings as hereinafter defined) of the Company and the associated Rights, representing 19.9% of the outstanding shares of Company Common Stock as of the date of this Agreement; WHEREAS, simultaneously with the execution and delivery of this Agreement, certain shareholders of the Company have entered into an agreement (the "Tender and Option Agreement") with the Parent and Merger Sub pursuant to which such shareholders have agreed to take certain actions with respect to the shares of Company Common Stock now or hereafter beneficially owned by such shareholders and have granted to the Parent and Merger Sub an unconditional, irrevocable option to purchase such shares of Company Common Stock on the terms and conditions set forth therein; WHEREAS, simultaneously with the execution and delivery of this Agreement, the Company has entered into consulting, employment and/or non- compete agreements with Messrs. Brian F. Sullivan, Reed A. Watson, Richard D. Hembree and Daniel B. Seebart; and WHEREAS, the holders of the $15 million principal amount of 5% Convertible Notes due 2003 (the "Convertible Notes") of the Company have consented in writing to the Merger. NOW, THEREFORE, in consideration of the mutual representations, warranties and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I THE OFFER SECTION 1.1. The Offer. (a) The Offer. Subject to the provisions of this Agreement and this Agreement not having been terminated, as promptly as practicable but in no event later than September 1, 1999, Merger Sub shall, and the Parent shall cause Merger Sub to, commence, within the meaning of Rule 14d-2 under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "Exchange Act"), an offer to purchase all of the outstanding shares of common stock, par value $.01 per share (the "Company Common Stock"), of the Company, together with the associated Rights, at a price equal to $35.25 per share of Company Common Stock (the "Merger Consideration"), net to the seller in cash (the "Offer"). Except where the context otherwise requires, all references herein to the shares of Company Common Stock shall include the associated Rights. The obligation of Merger Sub to, and of the Parent to cause Merger Sub to, commence the Offer and to accept for payment, and pay for, any shares of Company Common Stock tendered pursuant to the Offer shall be subject to the conditions set forth in Exhibit A and to the other terms and conditions of this Agreement. Subject to the provisions of this Agreement, the Offer shall expire 20 business days after the date of its commencement, unless this Agreement is terminated in accordance with Article IX, in which case the Offer (whether or not previously extended in accordance with the terms hereof) shall expire on such date of termination. (b) Waiver. Without the prior written consent of the Company, Merger Sub shall not (i) waive the Minimum Condition (as defined in Exhibit A), (ii) reduce the number of shares of Company Common Stock subject to the Offer, (iii) reduce the Merger Consideration, (iv) extend the Offer if all of the Offer conditions are satisfied or waived, (v) change the form of consideration payable in the Offer, or (vi) amend or modify any term or condition of the Offer (including the conditions set forth in Exhibit A) in any manner adverse to the holders of Company Common Stock. Notwithstanding anything herein to the contrary, Merger Sub may, in its reasonable discretion without the consent of the Company, extend the Offer at any time and from time to time (i) if at the then scheduled expiration date of the Offer any of the conditions to Merger Sub's obligation to accept for payment and pay for shares of Company Common Stock shall not have been satisfied or waived; (ii) for any period required by any rule, regulation, interpretation or position of the Securities and Exchange Commission (the "SEC") or its staff applicable to the Offer; (iii) for any period required by applicable Laws in connection with an increase in the consideration to be paid pursuant to the Offer; and (iv) if all Offer conditions are satisfied or waived but the number of shares of Company Common Stock tendered is 80% or more, but less than 90%, of the then outstanding number of shares of Company Common Stock, for an aggregate period of not more than 10 business days (for all such extensions under this clause (iv)) beyond the latest expiration date that would be permitted under clause (i), (ii) or (iii) of this sentence. In addition, if any condition set forth in Exhibit A is not satisfied at the scheduled expiration of the Offer but is reasonably capable of being satisfied within three business days thereof, Merger Sub shall, and Parent shall cause Merger Sub to, extend the Offer for three business days and the Parent and the Company shall each use reasonable efforts to cause such condition to become satisfied during such three business day period. Subject to the terms and conditions of the Offer and this Agreement (including the right of termination in accordance with Article IX), Merger Sub shall, and the Parent shall cause Merger Sub to, accept for payment and pay for, in accordance with the terms of the Offer, all shares of Company Common Stock validly tendered and not withdrawn pursuant to the Offer as soon as practicable after the expiration of the Offer but in no event later than two business days after expiration of the Offer. Notwithstanding the immediately preceding sentence and subject to the applicable rules of the SEC and the terms and conditions of the Offer, Merger Sub expressly reserves the right to delay payment for shares of Company Common Stock in order to comply in whole or in part with applicable Laws. Any such delay shall be effected in compliance with Rule 14e-1(c) under the Exchange Act. SECTION 1.2. Actions by the Parent and Merger Sub. (a) Offer Documents. As soon as reasonably practicable following execution of this Agreement, but in no event later than five business days from the date hereof, the Parent and Merger Sub shall prepare and file with the SEC a Tender Offer Statement on Schedule 14D-1 with respect to the Offer, which shall contain an offer to purchase and a related letter of transmittal and any other ancillary documents pursuant to which the Offer shall be made (such Schedule 14D-1 and the documents therein pursuant to which the Offer will be made, together with any supplements or amendments thereto, the "Offer Documents"). The Company and its counsel shall be given an opportunity to review and comment upon the Offer Documents (and shall provide any comments thereon as soon as practicable) prior to the filing thereof with the SEC. The Offer Documents shall comply as to form in all material respects with the requirements of the Exchange Act, and on the date filed with the SEC and on the date first published, sent or given to the Company's shareholders, the Offer Documents shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation is made by the Parent or Merger Sub with respect to information supplied by the Company for inclusion in the Offer Documents. Each of the Parent, Merger Sub and the Company agrees promptly to correct any information provided by it for use in the Offer Documents if and to the extent that such information shall have become false or misleading in any material respect, and each of the Parent, Merger Sub and the Company further agrees to take all steps necessary to cause the Offer Documents as so corrected to be filed with the SEC and to be disseminated to holders of shares of Company Common Stock, in each case as and to the extent required by applicable federal securities laws. The Parent and Merger Sub agree to provide the Company and its counsel in writing with any comments the Parent, Merger Sub or their counsel may receive from the SEC or its staff with respect to the Offer Documents promptly after receipt of such comments and with copies of any written responses and telephonic notification of any verbal responses by the Parent, Merger Sub or their counsel. (b) Funds. The Parent shall provide or cause to be provided to Merger Sub all of the funds necessary to purchase any shares of Company Common Stock that Merger Sub becomes obligated to purchase pursuant to the Offer. SECTION 1.3 Actions by the Company. (a) Company Approvals. The Company hereby approves of and consents to the Offer and represents and warrants that the Board of Directors of the Company (the "Board of Directors" or the "Board") at a meeting duly called and held has duly adopted resolutions (i) approving this Agreement, the Option Agreement, the Ancillary Documents, the Offer and the Merger, determining that the Merger is advisable and that the terms of the Offer and the Merger are fair to, and in the best interests of, the Company and the Company's shareholders and recommending that the Company's shareholders accept the Offer and approve the Merger and this Agreement, and (ii) taking all action necessary so that Sections 302A.671, 302A.673 and 302A.675 of the Minnesota Business Corporation Act (the "MBCA"), and the Rights Agreement, dated as of January 30, 1996, between the Company and Norwest Bank Minnesota, N.A., as Rights Agent, as amended (the "Rights Agreement"), are and, through the Effective Time, will be inapplicable to the Parent and Merger Sub, the Offer, the Merger, this Agreement, the Option Agreement, the Tender and Option Agreement, any of the Ancillary Documents or any of the transactions contemplated hereby or thereby. The Company further represents and warrants that the Board of Directors has received the written opinion of Goldman, Sachs & Co. (the "Financial Advisor") that the proposed consideration to be received by the holders of shares of Company Common Stock pursuant to the Offer and the Merger is fair to such holders from a financial point of view (the "Fairness Opinion"). The Company hereby consents to the inclusion in the Offer Documents of the recommendation of the Board of Directors described in the first sentence of this Section 1.3(a). The Company hereby represents and warrants that it has been authorized by the Financial Advisor to permit the inclusion of the Fairness Opinion and references thereto, subject to prior review and consent by the Financial Advisor (such consent not to be unreasonably withheld), in the Offer Documents, the Schedule 14D-9 and the Proxy Statement. The Company has been advised by its directors and executive officers that they intend to tender into the Offer all shares of Company Common Stock beneficially owned by them on the date hereof. (b) Schedule 14D-9. On the date the Offer Documents are filed with the SEC, the Company shall file with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 with respect to the Offer (such Schedule 14D-9, as amended from time to time, the "Schedule 14D-9") containing the recommendations described in Section 1.3(a) and shall disseminate the Schedule 14D-9 to the shareholders of the Company as required by Rule 14d-9 promulgated under the Exchange Act. To the extent practicable, the Company shall cooperate with Merger Sub and/or the Parent in mailing or otherwise disseminating the Schedule 14D-9 with the appropriate Offer Documents to the Company's shareholders. The Parent and its counsel shall be given an opportunity to review and comment upon the Schedule 14D-9 (and shall provide any comments thereon as soon as practicable) prior to the filing thereof with the SEC. The Schedule 14D-9 shall comply as to form in all material respects with the requirements of the Exchange Act and, on the date filed with the SEC and on the date first published, sent or given to the Company's shareholders, shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representation is made by the Company with respect to information supplied by the Parent or Merger Sub for inclusion in the Schedule 14D-9. Each of the Company, the Parent and Merger Sub agrees promptly to correct any information provided by it for use in the Schedule 14D-9 if and to the extent that such information shall have become false or misleading in any material respect, and the Company further agrees to take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed with the SEC and to be disseminated to the holders of shares of Company Common Stock, in each case as and to the extent required by applicable federal securities laws. The Company agrees to provide the Parent and Merger Sub and their counsel in writing with any comments the Company or its counsel may receive from the SEC or its staff with respect to the Schedule 14D-9 promptly after the receipt of such comments and with copies of any written response and telephonic notification of any verbal responses by the Company or its counsel. (c) Mailing. In connection with the Offer, the Company shall cause its transfer agent to furnish Merger Sub with mailing labels containing the names and addresses of the record holders of Company Common Stock as of a recent date and thereafter, until expiration of the Offer, of those persons becoming record holders subsequent to such recent date, together with copies of all lists of shareholders, security position listings and computer files and all other information in the Company's possession or control regarding the beneficial owners of Company Common Stock, and shall furnish to Merger Sub such information and assistance (including updated lists of shareholders, security position listings and computer files) as Merger Sub may reasonably request in communicating the Offer to the Company's shareholders. Subject to the requirements of applicable Laws, and except for such steps as are necessary to disseminate the Offer Documents and any other documents necessary to consummate the Offer and the Merger, the Parent and Merger Sub and each of their affiliates and associates shall hold in confidence the information contained in any of such labels, lists and files, shall use such information only in connection with the Offer and the Merger, and, if this Agreement is terminated, shall promptly deliver to the Company all copies of such information then in their possession or under their control. (d) Change in Law. Subject to the terms and conditions of this Agreement, if there shall occur a change in Law or in a binding judicial interpretation of existing Law which would, in the absence of action by the Company or the Board, prevent Merger Sub, were it to acquire a majority of the shares of Company Common Stock then outstanding on a fully diluted basis, from approving and adopting this Agreement by its affirmative vote as the holder of a majority of the outstanding shares of Company Common Stock and without the affirmative vote of any other shareholder, the Company will use its reasonable efforts to promptly take or cause such action to be taken. SECTION 1.4. Directors. (a) Appointment of Directors. Promptly upon the purchase of shares of Company Common Stock pursuant to the Offer, and from lime to time thereafter, the Parent shall be entitled to designate such number of directors, rounded up to the next whole number, as will give the Parent representation on the Board of Directors equal to the product of (i) the number of directors then on the Board of Directors and (ii) the percentage that the number of shares of Company Common Stock purchased by Merger Sub or the Parent or any affiliate pursuant to the Offer bears to the number of shares of Company Common Stock then outstanding (the "Percentage"), and the Company shall, upon request by the Parent, promptly increase the size of the Board of Directors and/or exercise its reasonable efforts to secure the resignations of such number of directors as is necessary to enable the Parent's designees to be elected to the Board of Directors and shall cause the Parent's designees to be so elected. At the request of the Parent, the Company will use its reasonable efforts to cause such individuals designated by the Parent to constitute the same Percentage of (i) each committee of the Board of Directors, (ii) the board of directors of REI Barbados and (iii) the committees of the board of directors of REI Barbados. The Company's obligations to appoint designees to the Board of Directors shall be subject to Section 14(f) of the Exchange Act. The Company shall take, at its expense, all action necessary to effect any such election, and shall include in the Schedule 14D-9 the information required by Section 14(f) of the Exchange Act and Rule 14f-l promulgated thereunder. The Parent will supply to the Company in writing and be solely responsible for any information with respect to itself and its nominees, directors and affiliates required by Section 14(f) and Rule 14f-l. Notwithstanding anything stated herein, if shares of Company Common Stock are purchased pursuant to the Offer, Parent and Merger Sub shall use reasonable efforts to assure that until the Effective Time, the Company's Board of Directors has at least one director who is a director on the date hereof and is not an employee of the Company. (b) Continuing Directors. Following the election or appointment of the Parent's designees pursuant to this Section 1.4 and prior to the Effective Time, the approval of a majority of the directors of the Company then in office who are not designated by the Parent (the "Continuing Directors") shall be required to authorize (and such authorization shall constitute the authorization of the Board of Directors and no other action on the part of the Company, including any action by any other director of the Company, shall be required to authorize) any amendment to the Company's articles of incorporation or by-laws, any termination of this Agreement by the Company, any amendment of this Agreement requiring action by the Board of Directors, any extension of time for the performance of any of the obligations or other acts of the Parent or Merger Sub, and any waiver of compliance with any of the agreements or conditions contained herein for the benefit of the Company. ARTICLE II THE MERGER SECTION 2.1. The Merger. Upon the terms and subject to the conditions of this Agreement, at the Effective Time (as defined in Section 2.2), in accordance with the MBCA, Merger Sub shall be merged with and into the Company in accordance with this Agreement and the separate existence of Merger Sub shall cease (the "Merger"). The Company shall be the surviving corporation in the Merger (hereinafter sometimes referred to as the "Surviving Corporation"). SECTION 2.2. Effective Time of the Merger. Upon the terms and subject to the conditions hereof, articles of merger (the "Articles of Merger") shall be duly prepared by the Surviving Corporation and executed by the Surviving Corporation and, if required under the MBCA, Merger Sub, and thereafter delivered to the Secretary of State of the State of Minnesota, for filing, on the Closing Date (as defined in Section 2.3). The Merger shall become effective as of the date and at such time as the Articles of Merger pursuant to Section 302A.615 of the MBCA (the "Merger Filing") with the Secretary of State of the State of Minnesota or at such subsequent date or time as shall be agreed by the Company and the Parent and specified in the Articles of Merger and in accordance with the MBCA (the time the Merger becomes effective pursuant to the MBCA being referred to herein as the "Effective Time"). SECTION 2.3. Closing. Subject to the satisfaction or waiver of all of the conditions to closing contained in Article VIII hereof, the closing of the Merger (the "Closing") will take place at 10:00 a.m., Minneapolis, Minnesota time, on a date to be specified by the parties, which shall be no later than two business days after the satisfaction or waiver of the conditions to Closing contained in Article VIII, at the offices of Robins, Kaplan, Miller & Ciresi L.L.P., 2800 LaSalle Plaza, 800 LaSalle Avenue, Minneapolis, Minnesota 55402, unless another date or place is agreed to in writing by the parties hereto. The date and time at which the Closing occurs is referred to herein as the "Closing Date." SECTION 2.4. Effects of the Merger. The Merger shall have the effects set forth in the MBCA, including Section 302A.641 of the MBCA. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the properties, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 2.5. Articles of Incorporation and Bylaws. (a) The articles of incorporation of Merger Sub in effect at the Effective Time shall be the articles of incorporation of the Surviving Corporation until amended in accordance with the terms thereof and with applicable Laws. (b) The bylaws of Merger Sub in effect at the Effective Time shall be the bylaws of the Surviving Corporation until amended in accordance with the terms thereof and with applicable Laws. SECTION 2.6. Directors. The directors of Merger Sub immediately prior to the Effective Time shall be the directors of the Surviving Corporation, each to hold office from the Effective Time in accordance with the articles of incorporation and bylaws of the Surviving Corporation and until his or her successor is duly elected and qualified. SECTION 2.7. Officers. The officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation, each to hold office from the Effective Time in accordance with the articles of incorporation and bylaws of the Surviving Corporation and until his or her successor is duly appointed and qualified. ARTICLE III CONVERSION OF SHARES SECTION 3.1. Conversion of Capital Stock. As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of Company Common Stock or of the holder of any shares of capital stock of Merger Sub: (a) Capital Stock of Merger Subsidiary. Each issued and outstanding share of common stock, par value $.01 per share, of Merger Sub shall be converted into and become one fully paid and nonassessable share of common stock, par value $.01 per share, of the Surviving Corporation. (b) Cancellation of Parent-Owned Stock. Any shares of Company Common Stock owned by the Parent, the Company, or any of their respective Subsidiaries shall automatically be cancelled and retired and shall cease to exist and no consideration shall be delivered in exchange therefor. (c) Exchange Ratio for Company Common Stock. Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (subject to Section 3.1(b) and other than Dissenting Shares) shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive cash in the amount of the Merger Consideration. As a result of the Merger and without any action on the part of the holder thereof, at the Effective Time all shares of Company Common Stock shall cease to be outstanding and shall be canceled and retired and shall cease to exist, and each holder of shares of Company Common Stock (other than the Parent, the Company or any of their respective Subsidiaries) shall thereafter cease to have any rights with respect to such shares of Company Common Stock, except the right to receive, without interest, the Merger Consideration in accordance with Section 3.2 upon the surrender of a certificate or certificates (a "Certificate") representing such shares of Company Common Stock or, with respect to Dissenting Shares, payment of the appraised value of Dissenting Shares in accordance with Section 3.6. (d) Stock Options. All Company Stock Options outstanding immediately prior to the Effective Time under the Company Option Plans, whether or not then exercisable, shall (by all appropriate and necessary action taken prior to the date of this Agreement of the Board of Directors or such committee or committees of the Board of Directors as are vested with authority to administer the Company Option Plans) be canceled. In cancellation thereof, each holder of an Option (other than Excluded Options) shall be entitled to receive, for each share of Company Common Stock subject to an Option (other than Excluded Options), an amount in cash equal to the excess, if any, of the Merger Consideration over the per share exercise price of such Option, without interest. The amounts payable pursuant to this Section 3.1(d) shall be subject to all applicable withholding of taxes. The Company shall use its reasonable efforts to obtain all necessary consents, if any, of the holders of Options to the cancellation of the Options in accordance with this Section 3.1(d). "Excluded Options" shall mean the options of the holders set forth in Section 3.1(d) of the Company Disclosure Letter which such holders have agreed will be cancelled without payment at the Effective Time. (e) Warrants. All warrants (individually, a "Warrant" and collectively, the "Warrants") to purchase Company Common Stock outstanding immediately prior to the Effective Time, whether or not then exercisable, shall (by all appropriate and necessary action taken prior to the date of the Board of Directors) be canceled and each holder of a Warrant shall be entitled to receive, for each share of Company Common Stock subject to a Warrant, an amount in cash equal to the excess, if any, of the Merger Consideration over the per share exercise price of such Warrant, without interest. The amounts payable pursuant to this Section 3.1(e) shall be subject to all applicable withholding of taxes. The Company shall use its reasonable efforts to obtain all necessary consents, if any, of the holders of Warrants to the cancellation of the Warrants in accordance with this Section 3.1(e). (f) Convertible Notes. The Convertible Notes outstanding immediately prior to the Effective Time shall be canceled and the holders of the Convertible Notes shall be entitled to receive an amount in cash equal to (i) the Merger Consideration, times (ii) the number of shares of Company Common Stock that would be issuable to such holders upon conversion of the Convertible Notes, based on the Merger Consideration (i.e., one share of Company Common Stock for each $14.85 principal amount of the Convertible Notes). No consideration or other value shall be paid to the holders of the Convertible Notes under this Section 3.1(f) in respect of the reset rights granted to the holders of the Convertible Notes pursuant to Section 9.6(j) of the Securities Purchase Agreement dated as of July 19, 1996, as amended by Amendment No. 1, dated as of March 31, 1997,and as further amended by the letter agreement dated April 24, 1997, between the Company and the other parties thereto. At the Effective Time, such reset rights shall be cancelled and shall expire. The amounts payable pursuant to this Section 3.1(f) shall be subject to all applicable withholding of taxes. The Company shall use its reasonable efforts to obtain all necessary consents, if any, of the holders of the Convertible Notes to the cancellation of the Convertible Notes in accordance with this Section 3.1(f). SECTION 3.2. Exchange of Certificates. (a) Paying Agent. Prior to the Effective Time, the Parent shall appoint a commercial bank or trust company having net capital of not less than $20 million, or such other party reasonably satisfactory to the Company, to act as paying agent hereunder for payment of the Merger Consideration upon surrender of Certificates (the "Paying Agent"). The Parent shall take all steps necessary to cause the Surviving Corporation, the Company or Merger Sub to provide the Paying Agent with cash in amounts necessary to pay for all the shares of Company Common Stock pursuant to Section 3.1(c) and, in connection with the Options, pursuant to Section 3.1(d), in connection with the Warrants, pursuant to Section 3.1(e), and in connection with the Convertible Notes, pursuant to Section 3.1(f), as and when such amounts are needed by the Paying Agent to fund the payment of checks presented to the Paying Agent. Such amounts shall hereinafter be referred to as the "Exchange Fund." (b) Mailing. As soon as practicable after the Effective Time, the Parent shall cause the Paying Agent to mail to each holder of record of shares of Company Common Stock immediately prior to the Effective Time (i) a letter of transmittal which shall specify that delivery shall be effected, and risk of loss and title to such Certificates shall pass, only upon delivery of the Certificates to the Paying Agent and which letter shall be in such form and have such other provisions as the Parent may reasonably specify and (ii) instructions for effecting the surrender of such Certificates in exchange for the Merger Consideration. Upon surrender of a Certificate to the Paying Agent together with such letter of transmittal, duly executed and completed in accordance with the instructions thereto, and such other documents as may reasonably be required by the Paying Agent, the holder of such Certificate shall be entitled to receive in exchange therefor the amount of cash into which shares of Company Common Stock theretofore represented by such Certificate shall have been converted pursuant to Section 3.1, and the shares represented by the Certificate so surrendered shall forthwith be canceled. No interest will be paid or will accrue on the cash payable upon surrender of any Certificate. In the event of a transfer of ownership of Company Common Stock which is not registered in the transfer records of the Company, payment may be made with respect to such Company Common Stock to such a transferee if the Certificate representing such shares of Company Common Stock is presented to the Paying Agent, accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 3.2, each Certificate shall be deemed, at any time after the Effective Time, to represent only the right to receive upon such surrender the amount of cash into which shares of Company Common Stock theretofore represented by such Certificate shall have been converted pursuant to Section 3.1. (c) No Transfers. At and after the Effective Time, there shall be no transfers on the stock transfer books of the Company of the shares of Company Common Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation, they shall be canceled and exchanged as provided in this Article III. (d) Unclaimed Portion of Exchange Fund. Any portion of the Exchange Fund (including the proceeds of any interest and other income received by the Paying Agent in respect of all such funds) that remains unclaimed by the former shareholders of the Company six months after the Effective Time shall be delivered to the Surviving Corporation. Any former shareholders of the Company who have not theretofore complied with this Article III shall thereafter look only to the Surviving Corporation for payment of any Merger Consideration that may be payable upon surrender of any Certificates such shareholder holds, as determined pursuant to this Agreement, without any interest thereon. (e) No Liability. None of the Parent, the Company, the Surviving Corporation, the Paying Agent or any other person shall be liable to any former holder of shares of Company Common Stock for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar Laws. (f) Lost Certificates. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by the Surviving Corporation, the posting by such person of a bond in such reasonable amount as the Surviving Corporation may direct as indemnity against any claim that may be made against it with respect to such Certificate, the Paying Agent will issue in exchange for such lost, stolen or destroyed Certificate the Merger Consideration payable in respect thereof pursuant to this Agreement. (g) Company ESPP. Prior to any public announcement that it has entered into this Agreement, the Company shall have taken all corporate action necessary to amend its 1994 Stock Purchase Plan (the "Company ESPP") such that, following the amendment of the Company ESPP, (i) no person shall commence to participate therein, (ii) no participant shall be permitted to increase the amount of payroll deductions in respect thereof, (iii) the "Stock Purchase Date" (as defined in the Company ESPP) to occur on or first following amendment of the ESPP (whichever is earlier) shall be the final date on which Company Common Stock is purchased thereunder, and (iv) the Company ESPP shall be terminated effective on the Effective Date. Promptly following such Stock Purchase Date, any payroll deductions not applied to the purchase of shares of Company Common Stock shall be remitted to participants. SECTION 3.3. Adjustments to Prevent Dilution. In the event that prior to the Effective Time there is a change in the number of shares of Company Common Stock or securities convertible or exchangeable into or exercisable for shares of Company Common Stock issued and outstanding as a result of a reclassification, stock split (including a reverse stock split), stock dividend or distribution or similar transaction, the Merger Consideration shall be equitably adjusted to eliminate the effects of that event. SECTION 3.4. Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, if required by the MBCA, but only to the extent required thereby, shares of Company Common Stock outstanding immediately prior to the Effective Time and held by a holder who has not voted in favor of the Merger and who has demanded appraisal for such shares in accordance with Section 302A.473 of the MBCA ("Dissenting Shares") shall not be converted into the right to receive the Merger Consideration as provided in Sections 3.1 and 3.2, unless and until such holder fails to perfect or withdraws or otherwise loses his right to appraisal and payment under the MBCA. If, after the Effective Time, any such holder fails to perfect or withdraws or loses his right to appraisal, such Dissenting Shares shall thereupon be treated as if they had been converted as of the Effective Time into the right to receive the Merger Consideration, if any, to which such holder is entitled, without interest or dividends thereon. The Company shall give the Parent prompt notice of any demands received by the Company for appraisal of shares and, prior to the Effective Time, the Parent shall have the right to participate in all negotiations and proceedings with respect to such demands. Prior to the Effective Time, the Company shall not, except with the prior written consent of the Parent, make any payment with respect to, or settle or offer to settle, any such demands. SECTION 3.5. Merger Without Meeting of Shareholders. Notwithstanding the foregoing, if Merger Sub, or any other direct or indirect Subsidiary of the Parent, shall acquire at least 90 percent of the outstanding shares of Company Common Stock pursuant to the Offer, the parties hereto shall take all necessary and appropriate action to cause the Merger to become effective as soon as practicable after the expiration of the Offer without a meeting of shareholders of the Company, in accordance with Section 302A.621 of the MBCA. ARTICLE IV REPRESENTATIONS AND WARRANTEES OF THE COMPANY Subject to the letter of the Company, dated the date hereof and addressed to the Parent and Merger Sub (the "Company Disclosure Letter"), the Company hereby represents and warrants to the Parent and Merger Sub that: SECTION 4.1. Organization and Qualifications; Subsidiaries. (a) Each of the Company and Recovery Engineering International, Ltd., a Barbados corporation ("REI Barbados") (i) is a corporation, partnership or other legal entity duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and (ii) has the requisite power and authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted, except, in the case of this clause (ii), where the failure to have such power, authority and governmental approvals would not, individually or in the aggregate, have a Company Material Adverse Effect (as defined below). Each of the Company and REI Barbados is duly qualified or licensed as a foreign corporation to transact business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for such failures to be so qualified or licensed and in good standing that would not, individually or in the aggregate, have a Company Material Adverse Effect. For purposes of this Agreement, a "Company Material Adverse Effect" shall mean any change or effect (i) that is materially adverse to the business, assets, financial condition or results of operations of the Company and REI Barbados, taken as a whole, (ii) that materially adversely affects the ability of the Company to consummate the transactions contemplated by this Agreement or that would prevent or materially delay consummation of the Merger, or (iii) that materially adversely affects the ability of the Company to conduct its business after the Closing consistent with the manner conducted in the past. (b) For purposes of this Agreement, a "Subsidiary" means, with respect to the Parent, the Company or any other person, any entity of which the Parent, the Company or such other person, as the case may be (either alone or through or together with any other Subsidiary), owns, directly or indirectly, stock or other equity interests the holders of which are generally entitled to more than 50% of the vote for the election of the board of directors or other governing body of such corporation or other legal entity. SECTION 4.2. Articles of Incorporation and Bylaws. The Company has heretofore made available to the Parent a complete and correct copy of the articles of incorporation and the bylaws or equivalent organizational documents, each as amended to the date hereof, of the Company and REI Barbados. Such articles of incorporation, bylaws and equivalent organizational documents are in full force and effect. The Company is not in violation of any provision of its articles of incorporation or bylaws. REI Barbados is not in violation of any provision of its articles of incorporation, bylaws or equivalent organizational documents, except for such violations that would not, individually or in the aggregate, have a Company Material Adverse Effect. SECTION 4.3. Capitalization. (a) The authorized capital stock of the Company consists of 100,000,000 shares of capital stock, all of which is Company Common Stock. As of August 25, 1999, (i)(A) 6,044,601 shares of Company Common Stock were issued and outstanding, all of which were validly issued, fully paid and nonassessable, (B) 6,044,601 common stock purchase rights ("Rights") issued pursuant to the Rights Agreement were issued and outstanding, and (C) no class or series of preferred stock of the Company had been established; and (ii)(A) options to purchase ("Plan Options") 1,279,667 shares of Company Common Stock which were granted pursuant to the Company's 1986 Stock Option Plan, the Company's 1994 Stock Option and Incentive Plan, and the Company's 1993 Director Stock Option Plan (the "Company Option Plans") were outstanding, (B) no shares of Company Common Stock were reserved for issuance pursuant to options under the Company Option Plans, (C) 80,000 shares of Company Common Stock were reserved for issuance upon exercise of outstanding options and warrants listed in Section 4.3 of the Company Disclosure Letter (the "Third Party Options" and, together with the Plan Options, the "Company Stock Options"), (D) 44,385 shares of Company Common Stock were reserved for issuance pursuant to the Company ESPP (with approximately 750 shares expected to be issued under the ESPP between the date hereof and the Closing Date, based on current prices for the Company Common Stock and the current contribution rates of participants in the Company ESPP at the date of this Agreement), (E) up to 1,377,410 shares of Company Common Stock were reserved for issuance upon conversion of the Convertible Notes at a conversion price described in Section 4.3 of the Company Disclosure Letter, (F) no shares of Company Common Stock were held by the Company in its treasury and (G) no shares of Company Common Stock were held by REI Barbados. The number of shares of Company Common Stock issuable upon conversion of the Convertible Notes, based on the Merger Consideration, is 1,010,101 shares. Except as set forth above, no shares of capital stock or other voting securities of the Company are issued, reserved for issuance or outstanding and, since August 25, 1999, no shares of capital stock or other voting securities or options in respect thereof have been issued except upon the exercise of the Company Stock Options outstanding on August 25, 1999. Except as set forth in this Section 4.3 or in Section 4.3 of the Company Disclosure Letter, and except as contemplated by this Agreement and the Ancillary Documents, there are no options, warrants, calls, rights, subscriptions, convertible or exchangeable securities or other rights, agreements, arrangements or commitments of any kind or character to which the Company or REI Barbados is a party (collectively, "Options") relating to the issued or unissued capital stock of the Company or REI Barbados, or obligating the Company or REI Barbados to issue, transfer, grant or sell any shares of capital stock of, or other equity interests in, or securities convertible into or exchangeable for any capital stock or other equity interests in, the Company or REI Barbados. Section 4.3 of the Company Disclosure Letter sets forth, for each Company Stock Option, the holder and the exercise price thereof. After the Effective Time, the Surviving Corporation will have no obligation to issue, transfer or sell any shares of capital stock of the Company or the Surviving Corporation pursuant to any Company Option Plan. Except as set forth in Section 4.3 of the Company Disclosure Letter, there are no voting trusts or other agreements or understandings to which the Company or REI Barbados is a party with respect to the voting of capital stock of the Company or REI Barbados. All shares of outstanding Company Common Stock have been duly authorized, validly issued and are nonassessable and all shares of Company Common Stock subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable. Except as set forth in Section 4.3 of the Company Disclosure Letter, there are no outstanding contractual obligations of the Company or REI Barbados to repurchase, redeem or otherwise acquire any shares of Company Common Stock or any other shares of capital stock of the Company or REI Barbados, or make any material investment (in the form of a loan, capital contribution or otherwise) in REI Barbados or any other person. (b) Each outstanding share of capital stock of REI Barbados is duly authorized, validly issued, fully paid and nonassessable and each such share is owned by the Company free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on voting rights, charges and other encumbrances of any nature whatsoever (collectively, "Liens"). Section 4.3 of the Company Disclosure Letter sets forth the authorized capital stock and the number of issued and outstanding shares of capital stock of REI Barbados. Except for REI Barbados, neither the Company nor REI Barbados owns directly or indirectly any interest or investment (whether equity or debt) in any corporation, partnership, joint venture, business, trust or other entity. REI Barbados (i) has not engaged in any business activity, (ii) does not have any liabilities of any kind, (iii) has assets with a value of less than $5,000, (iv) has not entered into any Contracts, and (v) is not the subject of any Litigation. SECTION 4.4. Authority Relative to This Agreement. The Company has all necessary corporate power and authority to execute and deliver this Agreement, the Option Agreement and the documents contemplated hereby or thereby or executed in connection herewith or therewith to which the Company is a party (the Option Agreement and such other agreements and documents, collectively, the "Ancillary Documents"), to perform its obligations hereunder and thereunder and, subject to adoption of this Agreement by the Required Company Vote (as defined in Section 4.13), if required by applicable Laws, to consummate the transactions contemplated hereby and thereby (the "Transactions"). The execution and delivery of this Agreement and any Ancillary Document by the Company and the consummation by the Company of the Transactions have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or any Ancillary Document or to consummate the Transactions (other than (i) the Required Company Vote, if required by applicable Laws, and (ii) the Merger Filing). This Agreement and any Ancillary Document have each been or will be duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery thereof by the Parent and Merger Sub, constitute or will constitute the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws relating to creditors rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). SECTION 4.5. No Conflict; Required Filings and Consents; Certain Contracts. (a) Except as set forth in Section 4.5(a) of the Company Disclosure Letter, the execution and delivery of this Agreement and the Ancillary Documents by the Company do not, and the performance of its obligations under this Agreement and the Ancillary Documents and the consummation of the Transactions by the Company will not, (i) conflict with or violate the articles of incorporation or bylaws or equivalent organizational documents of the Company or REI Barbados, (ii) subject to the making of the filings and obtaining the approvals identified in Section 4.5(b), conflict with or violate any law, rule, regulation, order, judgment or decree (collectively, "Laws") applicable to the Company or REI Barbados or by which any property or asset of the Company or REI Barbados is bound or affected or, directly or indirectly, result in any of the consequences referred to in subsection (a) of Exhibit A hereto, or (iii) conflict with or result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, result in the loss (by the Company, REI Barbados or the Surviving Corporation) or modification in a manner materially adverse to the Company and REI Barbados of any material right or benefit under, or give to others any right of termination, amendment, acceleration, repurchase or repayment, increased payments or cancellation of, or result in the creation of a Lien or other encumbrance on any property or asset of the Company or REI Barbados pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise, or other instrument or obligation, whether written or oral (collectively, "Contracts"), to which the Company or REI Barbados is a party or by which the Company or REI Barbados or any property or asset of the Company or REI Barbados is bound or affected, except, in the case of clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which would not, individually or in the aggregate, have a Company Material Adverse Effect. (b) The execution and delivery of this Agreement and the Ancillary Documents by the Company do not, and the performance of its obligations under this Agreement and the Ancillary Documents and the consummation of the Transactions by the Company will not, require any consent, approval, authorization or permit of, or filing with or notification to, any federal, state or local governmental or regulatory agency, authority, commission or instrumentality, whether domestic or foreign (each a "Governmental Entity"), except (i) for (A) applicable requirements of the Exchange Act and state securities or "blue sky" laws ("Blue Sky Laws"), (B) the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the "HSR Act"), and (C) the Merger Filing, and (ii) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not, individually or in the aggregate, have a Company Material Adverse Effect. (c) Except as set forth in Section 4.5(c) of the Company Disclosure Letter or in the Contracts filed (or incorporated) as exhibits to the Company's Annual Report on Form 10-K for the year ended January 3, 1999 or the other Company SEC Reports (as defined in Section 4.7) filed thereafter, there are no Contracts to which the Company is a party or by which the Company or any asset of the Company is bound, which by its terms limits in any material respect the ability of the Company or, after consummation of the Transactions, would by its terms limit in any material respect the ability of the Parent or any of its affiliates, to engage in any business in any area or for any period. SECTION 4.6. Compliance. Except as set forth in Section 4.6 of the Company Disclosure Letter, neither the Company nor REI Barbados is in conflict with, or in default or violation of, (i) any Law applicable to the Company or REI Barbados or by which any property or asset of the Company or REI Barbados is bound or affected, or (ii) any Contract to which the Company or REI Barbados is a party or by which the Company or REI Barbados or any property or asset of the Company or REI Barbados is bound or affected, except for any such conflicts, defaults or violations that would not, individually or in the aggregate, have a Company Material Adverse Effect. SECTION 4.7. SEC Reports and Financial Statements. Each form, report, schedule, registration statement and definitive proxy statement filed by the Company with the SEC since January 1, 1996 and prior to the date hereof (including exhibits and any amendments thereto) (as such documents have been amended prior to the date hereof, the "Company SEC Reports"), as of their respective dates, complied in all material respects with the applicable requirements of the Securities Act of 1933, as amended (the "Securities Act") and the Exchange Act and the rules and regulations thereunder. None of the Company SEC Reports, as of their respective dates, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Company has made available to the Parent true, accurate and complete copies of all of the Company SEC Reports. The consolidated financial statements (including any notes and related schedules) of the Company and REI Barbados included in such reports comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited interim financial statements, as permitted by Form 10-Q of the SEC) and fairly present in all material respects (subject, in the case of the unaudited interim financial statements, to normal, year-end audit adjustments) the consolidated financial position of the Company and REI Barbados as at the dates thereof and the consolidated results of their operations and cash flows for the periods then ended. Neither the Company nor REI Barbados has any liabilities or obligations (whether absolute, accrued, fixed, contingent, liquidated, unliquidated or otherwise) of any nature, except liabilities, obligations or contingencies (a) which are reflected on the audited balance sheet of the Company and REI Barbados as at January 3, 1999 (including the notes thereto), or (b) which (i) were incurred in the ordinary course of business after January 3, 1999 and consistent with past practices and which would not, individually or in the aggregate, have a Company Material Adverse Effect, (ii) are disclosed or reflected in the Company SEC Reports filed after January 3, 1999 and prior to the date of this Agreement or (iii) would not, individually or in the aggregate, have a Company Material Adverse Effect. Since January 1, 1996, the Company has timely filed with the SEC all forms, reports and other documents required to be filed prior to the date hereof, and REI Barbados has not filed, or been required to file, any form, report or other document with the SEC, in each case, pursuant to the Securities Act, the Exchange Act or the rules and regulations thereunder. SECTION 4.8. Absence of Certain Changes or Events. Except as set forth in Section 4.8 of the Company Disclosure Letter, as contemplated by this Agreement or as disclosed in any Company SEC Report filed prior to the date of this Agreement, since January 3, 1999, (i) the Company and REI Barbados have conducted their respective businesses only in the ordinary course, consistent with past practice, (ii) there has not occurred or arisen any event that, individually or in the aggregate, has had or would be reasonably expected to have a Company Material Adverse Effect excluding any circumstance, fact, change, development, effect or impairment resulting from (A) the entering into of this Agreement and the announcement thereof and the transactions contemplated hereby and (B) changes in general economic, financial, regulatory, political or market conditions, and (iii) neither the Company nor REI Barbados has taken any action which, if taken after the date hereof, would constitute a violation of or require the Parent's consent under Section 6.1. SECTION 4.9. Litigation. Except as disclosed in Section 4.9 of the Company Disclosure Letter or in the Company SEC Reports, there are (i) no claims, suits, actions, proceedings, arbitrations, investigations or audits (collectively, "Litigation") pending or, to the knowledge of the Company's executive officers, threatened, or (ii) no investigations or reviews by any Governmental Entity pending or, to the knowledge of the Company's executive officers, threatened, against, relating to or affecting the Company or REI Barbados, which in either case would have, individually or in the aggregate, a Company Material Adverse Effect, nor is there any judgment, decree, order, injunction, writ or rule of any court, governmental department, commission, agency, instrumentality or authority or any arbitrator outstanding against the Company or REI Barbados. SECTION 4.10. Information Statement. None of the information contained in the Schedule 14D-9, the information statement, if any, filed by the Company in connection with the Offer pursuant to Rule 14f-1 under the Exchange Act (the "Information Statement"), or incorporated by reference therein or any amendment or supplement thereto, at the respective times such documents are filed with the SEC or first published, sent or given to the Company's shareholders, contain or will contain any untrue statement of a material fact or omit or will omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading, except that no representation is made by the Company with respect to information supplied by the Parent or Merger Sub specifically for inclusion in the Schedule 14D-9 or Information Statement or any amendment or supplement. None of the information supplied or to be supplied by the Company for inclusion or incorporation by reference in the Offer Documents will, at the date of filing with the SEC, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. If at any time prior to the Effective Time the Company's executive officers shall obtain knowledge of any facts with respect to itself, any of its officers and directors or REI Barbados that would require the supplement or amendment to any of the foregoing documents in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or to comply with applicable Laws, such amendment or supplement shall be promptly filed with the SEC and, as required by Law, disseminated to the shareholders of the Company, and in the event the Parent shall advise the Company as to its obtaining knowledge of any facts that would make it necessary to supplement or amend any of the foregoing documents, the Company shall promptly amend or supplement such document as required and distribute the same to its shareholders. SECTION 4.11. Employee Benefit Plans. (a) Section 4.11 of the Company Disclosure Letter sets forth a list of each material pension, retirement, savings, disability, dental, health, life, death benefit, group insurance, profit-sharing, deferred compensation, stock purchase, stock option (or other equity award), bonus, incentive, termination, severance pay or other employee benefit plan, trust, arrangement, contract, commitment, agreement or policy (collectively, "Benefit Plans") sponsored or maintained by the Company or REI Barbados, in which present or former employees or directors of the Company or REI Barbados (or any beneficiary or dependent of the foregoing) participate, or pursuant to which the Company or REI Barbados may have any liability (contingent or otherwise) (collectively, the "Company Benefit Plans"). True and complete copies of the Company Benefit Plans (together with such other information related thereto as the Parent may reasonably have requested) have been delivered to the Parent. (b) Except as set forth in Section 4.11 of the Company Disclosure Letter and except as would not, individually or in the aggregate, have a Company Material Adverse Effect: (A) the Company Benefit Plans have been administered and are in compliance with the terms of such plan and all applicable Laws, (B) no "reportable event" (as such term is used in Section 4043 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (other than those events for which the 30 day notice has been waived pursuant to the regulations), "prohibited transaction" (as such term is used in Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code") or "accumulated funding deficiency" (as such term is used in Section 412 or 4971 of the Code) has heretofore occurred with respect to any Company Benefit Plan and (C) each Company Benefit Plan intended to qualify under Section 401(a) of the Code has received a favorable determination from the IRS regarding its qualified status and no event has occurred that could reasonably be expected to result in the loss of such qualified status. (c) There is no litigation or administrative or other proceeding, or any claim, suit, audit or investigation, involving any Company Benefit Plan (other than routine claims for benefits), nor, to the knowledge of the Company's executive officers, is any such proceeding threatened, in each case that, individually or in the aggregate, would have a Company Material Adverse Effect. Neither the Company nor REI Barbados has incurred, nor, to the knowledge of the Company's executive officers, is reasonably likely to incur any withdrawal liability with respect to any "multiemployer plan" (within the meaning of Section 3(37) of ERISA) which remains unsatisfied in an amount which would have a Company Material Adverse Effect. The termination of, or withdrawal from, any Company Benefit Plan or multiemployer plan to which the Company or REI Barbados contributes, will not subject the Company or REI Barbados to any liability under Title IV of ERISA that individually or in the aggregate would have a Company Material Adverse Effect. (d) At no time has the Company or REI Barbados (i) contributed to or been required to contribute to, or incurred any withdrawal liability (within the meaning of Section 4201 of ERISA) under, any "multiemployer plan" (within the meaning of Sections 3(37) or 4001(a)(3) of ERISA), or (ii) contributed to or been required to contribute to any "defined benefit plan" (within the meaning of Section 3(35) of ERISA). (e) Other than as set forth on Section 4.11 of the Company Disclosure Letter, the execution of, and performance of the transactions contemplated in, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) (i) constitute an event under any Company Benefit Plan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any current or former employee or director of the Company or REI Barbados, or (ii) result in the triggering or imposition of any restrictions or limitations on the right of the Company, the Parent or any of their Subsidiaries to amend or terminate any Company Benefit Plan. No payment or benefit which will or may be made by the Company, the Parent or any of their Subsidiaries will be characterized as an "excess parachute payment," within the meaning of Section 280G(b)(1) of the Code. SECTION 4.12. Labor and Employment Matters. Except as set forth in Section 4.12 of the Company Disclosure Letter, (a) neither the Company nor REI Barbados is a party to, or bound by, any collective bargaining agreement or other Contract or understanding with a labor union or labor organization; and (b) there is no (i) unfair labor practice, labor dispute (other than routine individual grievances) or labor arbitration proceeding pending or, to the knowledge of the Company's executive officers, threatened against the Company or REI Barbados, (ii) activity or proceeding by a labor union or representative thereof to organize any employees of the Company or REI Barbados, or (iii) lockouts, strikes, slowdowns, work stoppages or threats thereof by or with respect to such employees. SECTION 4.13. Vote Required. Unless the Merger may be consummated in accordance with Section 302A.621 of the MBCA, in which case no vote of the holders of the shares of Company Common Stock is required to approve this Agreement and the Transactions, the affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock entitled to vote (the "Required Company Vote") is the only vote or approval of the holders of any class or series of the Company's capital stock necessary to adopt this Agreement and approve the transactions contemplated hereby, except those approvals which have heretofore been obtained (assuming that neither the Parent nor its affiliates or associates (as defined in Section 302A.011 of the MBCA) are "interested shareholders" of the Company under Section 302A.673 of the MBCA immediately before the execution and delivery of this Agreement). SECTION 4.14. Opinion of Financial Advisor. The Company's Board of Directors has received the opinion of Goldman, Sachs & Co., dated August 25, 1999, to the effect that, as of such date, the Merger Consideration to be received by the shareholders of the Company is fair, from a financial point of view, to such shareholders. SECTION 4.15. Brokers. Except as set forth in Section 4.15 of the Company Disclosure Letter, no broker, finder or investment banker (other than Goldman, Sachs & Co.) is entitled to any brokerage, finder's or other fee or commission in connection with the Transactions based upon arrangements made by or on behalf of the Company. The Company has previously delivered to Parent a full and accurate copy of the Company's engagement letter with Goldman, Sachs & Co. Section 4.15 of the Company Disclosure Letter sets forth the Company's obligations to Goldman, Sachs & Co. in connection with its role as financial advisor to the Company. SECTION 4.16. Taxes. (a) Except as set forth in Section 4.16(a) of the Company Disclosure Letter: (i) The Company and REI Barbados have timely filed (or have had timely filed on their behalf) all Tax Returns required to be filed by any of them. All such Tax Returns are true, correct and complete in all respects except for such instances which, individually or in the aggregate, would not have a Company Material Adverse Effect. (ii) The Company and REI Barbados have paid (or have had paid on their behalf) all Taxes due, except for Taxes the non-payment of which, individually or in the aggregate, would not have a Company Material Adverse Effect. (iii) The most recent financial statements contained in the Company SEC Reports reflect full reserves for all Taxes payable by the Company and REI Barbados for all Tax periods and portions thereof through the date of such financial statements, except to the extent that any failure to so reserve, individually or in the aggregate, would not have a Company Material Adverse Effect. (iv) The Federal income Tax Returns of the Company have not been audited. There are no taxable years currently under Audit, and the Company has not been notified that any Audit by a Taxing Authority will commence with respect to the Company or REI Barbados. There are no outstanding waivers or pending requests for waivers to extend the statutory period of limitations to assess any Taxes on the Company or REI Barbados, except to the extent any such waiver or request for waiver, individually or in the aggregate, would not have a Company Material Adverse Effect. (v) No deficiency or adjustment for any Taxes has been proposed, asserted or assessed against the Company or REI Barbados that has not been paid or fully reserved for on the financial statements of the Company, except for deficiencies or adjustments that, individually or in the aggregate, would not have a Company Material Adverse Effect, and, to the knowledge of the Company's executive officers, no such deficiency or adjustment has been threatened. There are no Liens for material Taxes upon the assets or property of the Company or REI Barbados, except Liens for current Taxes not yet due. (vi) The Company and REI Barbados have withheld and paid over to the relevant Tax Authority all Taxes required to have been withheld and paid in connection with payments to employees, independent contractors, creditors, shareholders or other third parties, except for such Taxes which, individually or in the aggregate, would not have a Company Material Adverse Effect. (vii) Neither the Company nor REI Barbados is a party to any Tax sharing, Tax allocation, Tax indemnity or similar agreement. (viii) No "consent" within the meaning of Section 341(f) of the Code has been filed with respect to the Company or REI Barbados. (b) For purposes of this Agreement, the following terms shall have the following meanings: (i) "Audit" shall mean any audit, assessment of Taxes, other examination by any Tax Authority, proceeding or appeal of such proceeding relating to Taxes. (ii) "Taxes" shall mean all Federal, state, local and foreign income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, excise, employment, payroll, premium, alternative or added minimum, transfer, stamp, customs, duties or other taxes, and other assessments of a similar nature (whether imposed directly or through withholding), including any interest, additions to tax, or penalties applicable thereto and including any liability in respect of any tax as a transferee or successor, by Law, Contract or otherwise. (iii) "Tax Authority" shall mean the Internal Revenue Service and any other domestic or foreign governmental authority responsible for the administration of any Taxes. (iv) "Tax Returns" shall mean all Federal, state, local and foreign tax returns, declarations, statements, reports, schedules and forms relating to Taxes, including, without limitation, any information returns, claims for refund, declaration of estimated Tax and any amended tax return relating to Taxes. SECTION 4.17. Licenses and Permits. Except as set forth in Section 4.17 of the Company Disclosure Letter, the Company and REI Barbados have all necessary licenses, permits, certificates of need, approvals and authorizations (collectively, "Permits") from all Governmental Entities required to lawfully conduct their respective businesses as presently conducted, except for those Permits the lack of which, individually or in the aggregate, would not have a Company Material Adverse Effect, and (a) no Permit is subject to revocation or forfeiture by virtue of any existing circumstances, (b) there is no Litigation pending or, to the knowledge of the Company's executive officers, threatened to modify or revoke any Permit, and (c) no Permit is subject to any outstanding order, decree, judgment, stipulation, or investigation that would be likely to affect such Permit, except for instances of any of the foregoing items (a) through (c) which, individually or in the aggregate, would not have a Company Material Adverse Effect. SECTION 4.18. Title to Assets. (a) Section 4.18(a) of the Company Disclosure Letter sets forth a complete and accurate list of all leased and owned real properties of the Company. The Company has good and marketable title to all of its real and personal properties and assets reflected on the Balance Sheet of the Company at July 4, 1999 included in the Company's Quarterly Report on Form 10-Q for the period ended July 4, 1999 (the "1999 Balance Sheet"), free and clear of all Liens except for (i) Liens which secure indebtedness which is properly reflected in the 1999 Balance Sheet; (ii) Liens for Taxes accrued but not yet payable; (iii) Liens arising as a matter of law in the ordinary course of business with respect to obligations incurred after the date of the 1999 Balance Sheet, provided that the obligations secured by such Liens are not delinquent; and (iv) such imperfections of title and Liens, if any, as individually or in the aggregate would not have a Company Material Adverse Effect. Except as set forth in Section 4.18(a) of the Company Disclosure Letter, the Company owns, or has valid leasehold interests in, all properties and assets used by it in the conduct of its business, except where the absence of such ownership or leasehold interests would not individually or in the aggregate have a Company Material Adverse Effect. (b) Except as set forth in Section 4.18(b) of the Company Disclosure Letter, the Company does not have any legal obligation, absolute or contingent, to any other person to sell or dispose of any of its assets, other than orders for sale of inventory in the ordinary course of business, with an aggregate value in excess of $250,000. SECTION 4.19. Material Contracts. Section 4.19 of the Company Disclosure Letter sets forth a list as of the date hereof of all (i) Contracts for borrowed money or guarantees thereof, (ii) Contracts involving any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of these transactions), or any combination of these transactions (each a "Derivative" and collectively, "Derivatives"), (iii) Contracts containing covenants by the Company restricting its ability or the ability of any affiliates of the Company to engage in any line of business, (iv) Contracts to purchase materials, supplies or other assets, other than purchase orders entered into in the ordinary course of business consistent with the customary past practice of the Company and other Contracts involving obligations of less than $250,000 individually and $500,000 in the aggregate, (v) Contracts to purchase or acquire advertising or other product promotion or brand support other than spot orders purchased in the ordinary course of business or involving commitments by the Company of less than $250,000, (vi) Contracts with distributors, sub-distributors or sales agents for the Company or in which the Company acts as distributor or sales agent for others, (vii) Contracts in which the Company's surviving liability (including indemnities) could exceed $250,000 and involving the sale or other disposition by the Company of one or more business units, divisions or entities (including former Subsidiaries); (viii) Contracts involving the sale, disposition or licensing of other material assets of the Company (including intellectual property), other than the sale of inventory in the ordinary course of business, (ix) Contracts involving the investment, including by way of capital contribution, loan or advance, by the Company in any other person, firm or entity, other than cash and cash equivalents and other than investments no longer owned by the Company, (x) other Contracts under which the unpaid liability of the Company is $250,000 or more or are otherwise material, and (xi) promotion Contracts with a term of longer than three (3) months (all Contracts described in each of the categories (i) through (xi) above, "Material Contracts"). All Material Contracts to which the Company is a party or by which any of its assets are bound are valid and binding, in full force and effect and enforceable against the parties thereto in accordance with their respective terms, except where the failure to be so valid and binding, in full force and effect or enforceable would not individually or in the aggregate have a Company Material Adverse Effect. There is not under any such Contract, any existing default, or event, which after notice or lapse of time, or both, would constitute a default, by the Company, or to the knowledge of the Company's executive officers, any other party, other than any such defaults or events which, individually or in the aggregate, would not have a Company Material Adverse Effect. SECTION 4.20. Intellectual Property Rights. (a) The Company and REI Barbados have and will, after giving effect to the consummation of the Transactions, have to the same extent and on the same terms as prior to the Closing, (i) valid rights to use, whether through ownership, licensing or otherwise, all patents, trademarks, service marks, trade dress, trade names, domain names, copyrights, trade secrets (where recognized by applicable law), licenses, information, proprietary rights and processes that are used in its business as now conducted (collectively the "Intellectual Property Rights"), and (ii) except as disclosed in Section 4.20 of the Company Disclosure Letter, the right to require the applicant of any Intellectual Property Right which is an application to transfer ownership thereof and of the related registration to the Company or REI Barbados once it issues. (b) Except as disclosed in Section 4.20 of the Company Disclosure Letter, no Intellectual Property Right is subject to any outstanding judgment, injunction, order, decree or agreement restricting the use thereof by the Company or REI Barbados, except for any judgment, injunction, order, decree or agreement which would not reasonably be expected to have a Company Material Adverse Effect. (c) Each Intellectual Property Right which is a patent, patent application, trademark registration, trademark application, service mark registration, service mark application, domain name (with respect to domain names, to the knowledge of the Company's executive officers), copyright registration or copyright application, is set forth on Section 4.20 of the Company Disclosure Letter. All registered patents, trademarks, domain names, service marks and copyrights listed on Section 4.20 of the Company Disclosure Letter are valid (when in use) and existing and in full force and effect, and owned by the Company or REI Barbados free and clear of any Liens. Section 4.20 of the Company Disclosure Letter sets forth a complete and accurate list of all Contracts in which the Company is a licensor or licensee of Intellectual Property Rights. (d) To the knowledge of the Company's executive officers, other than as set forth on Section 4.20 of the Company Disclosure Letter: (i) no third party has interfered with, infringed upon, misappropriated or otherwise come into conflict with any of the Intellectual Property Rights except in such a way as would not jeopardize the validity of such Intellectual Property Rights or the ability of the Company or REI Barbados to use the registered patents or the Intellectual Property Rights in substantially the manner they are used on the date hereof, and (ii) neither the Company nor REI Barbados, by using the Intellectual Property Rights, has materially interfered with, infringed upon, misappropriated or otherwise come into conflict with any material registered trademark of any third party nor, by using such registered patents, any material registered patent of any third party. SECTION 4.21. State Takeover Statutes Inapplicable. From and after the date hereof and at all times at or prior to the Effective Time, (i) Sections 302A.67l, 302A.673 and 302A.675 of the MBCA will be inapplicable to the Offer, the Merger, this Agreement, the Ancillary Documents, the Tender and Option Agreement and the transactions contemplated hereby and thereby, and the Company has received an opinion to that effect from Robins, Kaplan, Miller & Ciresi L.L.P., and (ii) no other takeover Law in effect on the date hereof could affect the ability of the Parent or Merger Sub to consummate the transactions contemplated hereby or thereby or have, either individually or in the aggregate, a Company Material Adverse Effect or a Parent Material Adverse Effect. SECTION 4.22. Rights Agreement. Pursuant to action of the Board of Directors on August 25, 1999, the Company amended (the "Rights Amendment") the Rights Agreement so that the Rights Agreement will not affect or be affected by this Agreement, the Option Agreement, the Tender and Option Agreement, the Offer, the announcement of the Offer, the purchase of shares of Company Common Stock by the Parent or Merger Sub pursuant to the Offer, the Merger, or any transaction contemplated hereby or thereby, and the Company has received an opinion to that effect from Robins, Kaplan, Miller & Ciresi L.L.P. The Distribution Date (as defined in the Rights Agreement) has not occurred. The Rights Amendment has been duly authorized, executed and delivered by the Company and is valid and enforceable in accordance with its terms. SECTION 4.23. Year 2000. (a) The Company is in the process of conducting an inventory and assessment of all software, computers, network equipment, technical infrastructure, production equipment and other equipment and systems that are material to the operation of its business and that rely on, utilize or perform date or time processing ("Systems") to ensure that the Systems are Year 2000 Compliant. (b) The Company reasonably expects that implementation and testing of the Systems to ensure that they are Year 2000 Compliant will be completed by September 30, 1999. Any failure of any of the Company's Systems to be Year 2000 Compliant has not had and is not reasonably expected to have a Company Material Adverse Effect. (c) In addition to upgrading its own Systems, the Company has contacted certain significant suppliers to determine whether their Systems are Year 2000 Compliant. The Company has not received any information which would indicate that the Systems of its suppliers will not be Year 2000 Compliant to the extent the same could reasonably be expected to result in any significant disruption to the Company's sources of supplies. (d) "Year 2000 Compliant" means a System will at all times: (i) consistently and accurately handle and process date and time information and data values before, during and after January 1, 2000, including but not limited to accepting date input, providing date output, and performing calculations on or utilizing dates or portions of dates; (ii) function accurately and in accordance with its specifications without interruption, abnormal endings, degradation, change in operation or other impact, or disruption of other systems, resulting from processing date or time data with values, before, during and after January 1, 2000; (iii) respond to and process two-digit date input in a way that resolves any ambiguity as to century; and (iv) store and provide output of date information in ways that are unambiguous as to century. SECTION 4.24. Insurance. The Company and REI Barbados maintain in force insurance policies and bonds in such amounts and against such liabilities and hazards as are consistent with industry practice. A complete list of all material insurance policies is set forth in Section 4.24 of the Company Disclosure Letter. Except as set forth in Section 4.24 of the Company Disclosure Letter, neither the Company nor REI Barbados is now liable, nor will any of them become liable, for any retroactive premium adjustment not reflected in the 1999 Balance Sheet or otherwise provided for as set forth in Section 4.24 of the Company Disclosure Letter. All policies are valid and enforceable and in full force and effect, all premiums owing in respect thereof have been timely paid, and neither the Company nor REI Barbados has received any notice of premium increase or cancellation with respect to any of its insurance policies or bonds. Except as set forth in Section 4.24 of the Company Disclosure Letter and except for any matters which, individually or in the aggregate, would not have a Company Material Adverse Effect, there are no claims pending as to which the insurer has denied liability or is reserving its rights, and all claims have been timely and properly filed. Within the last three years, neither the Company nor REI Barbados has been refused any insurance coverage sought or applied for, and the Company has no reason to believe that their existing insurance coverage cannot be renewed as and when the same shall expire, upon terms and conditions standard in the market at the time renewal is sought. SECTION 4.25. Environmental Matters. (a) Except as disclosed on Section 4.25 of the Company Disclosure Letter and except as to matters that would not reasonably be expected to have a Company Material Adverse Effect: (i) no written notice, request for information, order, complaint or penalty has been received, and there are no judicial or administrative actions, suits or proceedings pending or, to the knowledge of the Company's executive officers, threatened, which allege a violation of any Environmental Laws, in each case relating to the Company and arising out of any Environmental Laws; (ii) the Company has all environmental permits necessary for its operations to comply with all applicable Environmental Laws, and is in compliance with the terms of such environmental permits, has made all appropriate filings for the issuance or renewal of such environmental permits and is in compliance with all other applicable Environmental Laws; (iii) all of the facilities currently owned, leased or operated by the Company are free of any Hazardous Substances (except those authorized pursuant to and in accordance with applicable Environmental Laws) and are free of all contamination arising from, relating to, or resulting from any such Hazardous Substances, and there has been no release or other dissemination at any time during the ownership or occupancy by the Company or REI Barbados of such facilities of any Hazardous Substances at, on, about, under or within any such facilities (other than pursuant to and in accordance with applicable Environmental Laws) and there are no facilities formerly owned or operated by the Company or REI Barbados which are not currently owned by them; (iv) neither the Company nor REI Barbados has used any waste disposal site, or otherwise disposed of, transported or arranged for the transportation of any Hazardous Substances to any place or location in violation of any Environmental Laws; and (v) all written environmental audits and reports conducted within the past five years by the Company or REI Barbados of any property currently owned or leased or operated by the Company or REI Barbados have been delivered to the Parent prior to the date hereof. (b) The following terms shall have the meaning set forth below: (i) "Hazardous Substances" means any pollutant, contaminant or any toxic, radioactive or other hazardous substance as such terms are defined in, or identified pursuant to, any Environmental Law. (ii) "Environmental Costs" means any reasonable investigation, testing, sampling, cleanup, remediation, removal or other response costs, costs to achieve and maintain compliance with Environmental Laws, expenses of consultants, counsel and other experts, liabilities (including liabilities for damages for personal injury or property damage and natural resources damage), civil or criminal fines or penalties, judgments and amounts paid in settlement in each case arising out of or relating to or resulting from any environmental matter. (iii) "Environmental Laws" means any and all common and statutory laws, regulations, ordinances and rules, in each case as in effect on the date hereof, that have as their principal purpose the protection of the environment. ARTICLE V REPRESENTATIONS AND WARRANTEES OF THE PARENT AND MERGER SUB The Parent and Merger Sub hereby represent and warrant to the Company that: SECTION 5.1. Organization and Qualifications; Subsidiaries. Each of the Parent and Merger Sub is a corporation, partnership or other legal entity duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has the requisite power and authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted, except where the failure to be so organized, existing or in good standing or to have such power, authority and governmental approvals would not, individually or in the aggregate, have a Parent Material Adverse Effect (as defined below). For purposes of this Agreement, a "Parent Material Adverse Effect" shall mean any change or effect that adversely affects the ability of the Parent to consummate the transactions contemplated by this Agreement in any material respect, or that would prevent or delay in any material respect consummation of the Merger. SECTION 5.2. Certificate of Incorporation and Bylaws. The Parent has heretofore made available to the Company a complete and correct copy of the certificate of incorporation and the bylaws or equivalent organizational documents, each as amended to the date hereof, of the Parent and Merger Sub. Such certificates of incorporation, bylaws and equivalent organizational documents are in full force and effect. The Parent is not in violation of any provision of its certificate of incorporation or bylaws. Merger Sub is not in violation of any provision of its certificate of incorporation, bylaws or equivalent organizational documents, except for such violations as would not, individually or in the aggregate, have a Parent Material Adverse Effect. SECTION 5.3. Authority Relative to This Agreement. Each of the Parent and Merger Sub has all necessary corporate power and authority to execute and deliver this Agreement, the Ancillary Documents and the Tender and Option Agreement, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement, the Ancillary Documents and the Tender and Option Agreement by the Parent and Merger Sub and the consummation by the Parent and Merger Sub of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of the Parent or Merger Sub are necessary to authorize this Agreement, the Ancillary Documents and the Tender and Option Agreement or to consummate the transactions contemplated hereby or thereby (other than the Merger Filing). This Agreement, the Ancillary Documents and the Tender and Option Agreement have each been duly and validly executed and delivered by the Parent and Merger Sub and, assuming the due authorization, execution and delivery thereof by the Company, constitute the legal, valid and binding obligation of the Parent and Merger Sub, enforceable against the Parent and Merger Sub in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws relating to creditors rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). SECTION 5.4. No Conflict, Required Filings and Consents. (a) The execution and delivery of this Agreement by the Parent and Merger Sub do not, and the performance of their respective obligations under this Agreement, the Ancillary Documents and the Tender and Option Agreement and the consummation of the transactions contemplated hereby and thereby by the Parent and Merger Sub will not, (i) conflict with or violate the articles of incorporation or bylaws or equivalent organizational documents of the Parent or Merger Sub, (ii) subject to making the filings and obtaining the approvals identified in Section 4.5(b), conflict with or violate any Law applicable to the Parent or Merger Sub or by which any property or asset of the Parent or Merger Sub is bound or affected, except, in the case of clause (ii), for any such conflicts, violations, breaches, defaults or other occurrences which would not, individually or in the aggregate, have a Parent Material Adverse Effect. (b) The execution and delivery of this Agreement, the Ancillary Documents and the Tender and Option Agreement by the Parent and Merger Sub do not, and the performance of their respective obligations under this Agreement, the Ancillary Documents and the Tender and Option Agreement and the consummation of the transactions contemplated hereby and thereby by the Parent and Merger Sub will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, except (i) for (A) applicable requirements, if any, of the Exchange Act or the Blue Sky laws, (B) the premerger notification requirements of the HSR Act, and (C) the Merger Filing, and (ii) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not, individually or in the aggregate, prevent or delay in any material respect consummation of the Merger, or otherwise prevent the Parent or Merger Sub from performing its respective obligations under this Agreement in any material respect, and would not, individually or in the aggregate, have a Parent Material Adverse Effect. SECTION 5.5. Offer Documents. None of the information contained in the Offer Documents or any schedule thereto required to be filed with the SEC or in any amendment or supplement thereto will contain, on the date of filing with the SEC, any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they are made, not misleading, except that no representation is made by the Parent or Merger Sub with respect to information supplied by the Company specifically for inclusion in the Offer Documents or any schedule thereto required to be filed with the SEC or in any amendment or supplement thereto. None of the information supplied by the Parent or Merger Sub specifically for inclusion in the Schedule 14D-9 will, at the date of filing with the SEC, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. SECTION 5.6. Board Approval. The Board of Directors of the Parent by resolutions duly adopted at a meeting duly called and held, has approved this Agreement, the Merger and the other transactions contemplated hereby. SECTION 5.7. Vote Required . No vote of the holders of any class or series of the Parent's capital stock is necessary to adopt this Agreement and approve the transactions contemplated hereby. SECTION 5.8. No Arrangements Triggering Section 302A.673 of the MBCA. Neither the Parent nor, to the best of the knowledge of Parent's executive officers, any of its affiliates or associates (each as defined in Section 302A.011 of the MBCA) is party to any contract, agreement or other arrangement, that would cause it to be an "interested shareholder" within the meaning of Section 302A.011(Subd. 49) of the MBCA. SECTION 5.9. Merger Sub. Merger Sub has not conducted any activities other than in connection with the organization of Merger Sub, the negotiation and execution of this Agreement, and the consummation of the transactions contemplated hereby. Merger Sub has no Subsidiaries. SECTION 5.10. Financing. At the consummation of the Offer and at the Effective Time, the Parent will have or will cause Merger Sub to have funds available to the Parent or Merger Sub sufficient to consummate the Offer and the Merger on the terms contemplated hereby. ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER SECTION 6.1. Conduct of Business of the Company Pending the Merger. The Company covenants and agrees that, except as expressly permitted or contemplated by this Agreement or as set forth in Section 6.1 of the Company Disclosure Letter, until the Effective Time, unless the Parent shall otherwise agree in writing prior to the taking of any action otherwise prohibited by the terms of this Section 6.1, the Company shall, and shall cause REI Barbados to, conduct its operations and business in the ordinary and usual course of business, and consistent with past practice and use its reasonable efforts to preserve intact its business organizations' goodwill, maintain in effect all existing material qualifications, licenses, permits, approvals and other authorizations, substantially comply with all applicable Laws, keep available the services of its present executive officers and key employees, and preserve the goodwill and business relationships with suppliers, distributors, customers and others having business relationships with it. Without limiting the generality of the foregoing, and except as otherwise expressly permitted by this Agreement or as set forth in Section 6.1 of the Company Disclosure Letter, prior to the Effective Time, without the prior written consent of the Parent, the Company will not, and will cause REI Barbados not to: (a) except to the extent required by Law or the rules and regulations of The Nasdaq Stock Market, amend or otherwise change the articles of incorporation or bylaws of the Company; (b) issue or authorize or propose the issuance of, sell, pledge or dispose of, grant or otherwise create, or agree to issue or authorize or propose the issuance, sale, pledge or disposition of, grant or otherwise create any additional shares of, or any Options to acquire any shares of, its capital stock or any debt or equity securities convertible into or exchangeable for such capital stock or accelerate any right to convert or exchange or acquire any securities of the Company for any such shares or ownership interest or take any action to cause to be exercisable any otherwise unexercisable option under any Company Stock Option granted under any Company Option Plan, other than (i) the issuance of 1,010,101 shares of Company Common Stock upon the conversion of the Convertible Notes, (ii) any such issuance pursuant to the exercise of Company Stock Options granted prior to the date hereof under the Company Option Plans, in accordance with their respective terms as in effect on the date hereof, (iii) the issuance of shares of Company Common Stock pursuant to the Company ESPP in accordance with its terms as in effect on the date hereof in accordance with Section 3.2(g). (c) purchase, redeem or otherwise acquire or retire, or offer to purchase, redeem or otherwise acquire or retire, (i) any shares of its capital stock (including any Options with respect to its capital stock and any security convertible or exchangeable into its capital stock), or (ii) any long-term debt; (d) declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock, or subdivide, reclassify, recapitalize, split, combine or exchange any of its shares of capital stock or otherwise change its capitalization as it exists on the date hereof; (e) incur or become contingently liable with respect to any indebtedness for borrowed money or the deferred purchase price for property or services or pursuant to any capital lease or other financing or guarantee any such indebtedness or issue any debt securities; (f) except as may be required by applicable Laws, or as contemplated by this Agreement, (i) increase the compensation payable or to become payable to, or enter into any employment agreement with, its executive officers or employees, except to non-executive officers in the ordinary course of business consistent with past practice; (ii) grant any severance or termination pay to any director, executive officer or employee of the Company or REI Barbados, except pursuant to existing Company Benefit Plans; (iii) enter into any severance agreement with any director, executive officer or employee; or (iv) except as required by applicable Laws, establish, adopt, enter into, terminate, withdraw from or amend in any material respect or take action to accelerate or waive (or otherwise diminish) any rights or benefits under any Company Benefit Plan or any other plan, program or arrangement, or any material employment policy; (g) take any action, other than reasonable actions in the ordinary course of business and consistent with past practice, with respect to accounting policies or procedures (including Tax accounting policies, procedures and elections relating to Taxes that would apply to the Company after the Merger), except as may be required by generally accepted accounting principles, or settle any material Audit, make any material Tax election or settle any material Tax liability or, except as required by Law, amend in any material respect any material Tax Return; (h) acquire or agree to acquire by merging or consolidating with, or by purchasing an equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business entity; (i) mortgage or otherwise encumber or subject to any Lien, or sell, transfer or otherwise dispose of (by merger or otherwise), any of its properties or assets, other than encumbrances and Liens that are incurred in the ordinary course of business and consistent with past practice and sales, transfers and dispositions of inventory in the ordinary course of business and consistent with past practice; (j) settle or compromise any material pending or threatened Litigation; (k) make any advance, loan, extension of credit or capital contribution to, or purchase or acquire (by merger or otherwise) any stock, bonds, notes, debentures or other securities of, or any assets constituting a business unit of, or make any other investment in, any person, firm or entity, except (a) extensions of trade credit and endorsements of negotiable instruments and other negotiable documents in the ordinary course of business, (b) investments in cash and cash equivalents, and (c) payroll and travel advances in the ordinary course of business; (l) make any capital expenditures in the aggregate for the Company and REI Barbados in excess of the amounts specified in the Company's budget for capital expenditures, a true and complete copy of which has previously been delivered to the Parent; (m) waive, amend or allow to lapse any term or condition of any confidentiality or "standstill" agreement to which the Company is a party; (n) enter into (a) any Contracts with distributors or sales agents other than Contracts terminable without penalty on less than 30 days' notice, (b) any Contracts to distribute products for others or which restrict the ability of the Company, REI Barbados or the Company's affiliates to compete or (c) any other Contracts that would constitute Material Contracts; or amend any of the foregoing agreements as they exist on the date hereof; (o) amend, change or waive (or exempt any person or entity from the effect of) the Rights Agreement, or redeem the Rights, except in connection with the transactions contemplated under this Agreement or the Ancillary Documents; (p) change any of the accounting principles or practices used by the Company; (q) effect any material change in the Company's advertising, product promotion or brand support policies or programs or commit to any significant new product promotion or advertising campaign; (r) effect any material change in the Company's billing practices or sales terms, or cause or permit a material acceleration or delay in the manufacture, shipment or sale of inventory, the collection of accounts or notes receivable or the payment of accounts or notes payable; (s) enter into any Contracts for Derivatives; (t) waive, relinquish, release or terminate any right or claim, including any such right or claim under any Material Contract, except in the ordinary course of business consistent with the customary past practice of the Company, or permit any rights of material value to use any Intellectual Property to lapse or be forfeited; (u) take any action to cause the Company Common Stock to be delisted from the NASDAQ National Market prior to the completion of the Offer; (v) take any action that would reasonably be expected to result in the conditions contained in Section 8.2(a) or 8.2(b) not to be satisfied; or (w) authorize any of, or commit or agree to take any of, the foregoing actions. ARTICLE VII ADDITIONAL COVENANTS SECTION 7.1. Access to Information. (a) From the date hereof to the Effective Time, the Company shall (and shall cause REI Barbados and their respective officers, directors, employees, auditors and agents to) afford the officers, employees, auditors, agents and advisors (the "Representatives") of the Parent access at all reasonable times to its officers, employees, agents, properties, offices, plants and other facilities, books, records (including auditors work papers) and Tax Returns, and shall furnish such Representatives with all financial, operating and other data and information as may be reasonably requested, and permit the Parent to make such copies of documents and such inspections and investigations, including, without limitation, such environmental assessments and testing as the Parent may request. All information so obtained will be subject to the Confidentiality Agreement, dated June 24, 1999, between and the Financial Advisor on behalf of the Company and the Parent, as amended on July 27, 1999 (the "Confidentiality Agreement"). (b) No investigation pursuant to this Section 7.1 shall affect any representation or warranty in this Agreement of any party hereto or any condition to the obligations of the parties hereto. SECTION 7.2. No Solicitation. (a) The Company shall not, nor shall it permit REI Barbados, or any officer or director to, and shall use its best efforts to cause the employees, agents or Representatives of the Company and REI Barbados (including, without limitation, any investment banker, attorney or accountant retained by the Company or REI Barbados), not to, directly or indirectly, (i) initiate, solicit or knowingly encourage, facilitate or assist (including by furnishing any information or providing any access to the properties, books or records of the Company) any inquiries or proposals that constitute, or could reasonably be expected to lead to, a proposal or offer for a merger, consolidation, business combination, sale of assets representing a material portion of the assets of the Company and REI Barbados, taken as a whole, sale of shares of capital stock representing, individually or in the aggregate, 10% or more of the voting power of the Company, including, without limitation, by way of a tender offer or exchange offer by any person for shares of capital stock representing 10% or more of the voting power of the Company, other than the Transactions (any of the foregoing inquiries or proposals being referred to in this Agreement as an "Acquisition Proposal"), (ii) engage in negotiations or discussions concerning, or provide to any person or entity any information or data relating to the Company or REI Barbados for the purposes of making, any Acquisition Proposal, (iii) agree to, approve or recommend any Acquisition Proposal or (iv) take any other action inconsistent with the obligations and commitments assumed by the Company pursuant to this Section 7.2; provided, however, that nothing contained in this Agreement shall prevent the Company or its Board of Directors from (A) furnishing nonpublic information to, entering into customary confidentiality agreements with, or entering into discussions or negotiations with, any person or entity in connection with an unsolicited bona fide written Acquisition Proposal to the Company or its shareholders, if the Company provides the Parent with at least 2 business days' notice of its intent to do so and the Acquisition Proposal is made in writing prior to Merger Sub and/or the Parent having purchased any shares of Company Common Stock under the Offer and the Board of Directors of the Company, by action of a majority of the entire Board of Directors of the Company, determines in good faith that such Acquisition Proposal constitutes, or is reasonably likely to lead to, a Superior Proposal or (B) taking and disclosing to its shareholders a position with respect to such Acquisition Proposal or making any other public disclosure that, in the opinion of the Company's counsel, is required by applicable Laws; provided, however, that the Board of Directors will not recommend that the shareholders of the Company tender their shares of Company Common Stock into any tender offer unless (i) the Board of Directors determines that such tender offer constitutes a Superior Proposal and (ii) the Company has provided the Parent and Merger Sub with not less than two business days' prior notice of its intent to do so. For purposes of this Agreement, "Superior Proposal" means a bona fide written Acquisition Proposal which was not solicited, encouraged or knowingly facilitated in violation of this Section 7.2, and which was received in writing by the Company prior to Merger Sub and/or the Parent having purchased any shares of Company Common Stock under the Offer and which a majority of the members of the Board of Directors of the Company determines in their good faith judgment (after consultation with independent financial advisors) to be more favorable from a financial point of view to the Company and its shareholders than the Merger, after giving effect to any increase in the Merger Consideration offered by the Parent and Merger Sub, and is reasonably capable of being completed, taking into account all legal, financial, regulatory and other aspects of such proposal; provided, however, that an Acquisition Proposal shall not constitute a Superior Proposal if the Acquisition Proposal is subject to a financing condition unless the Board of Directors, by action of a majority of the entire Board of Directors in good faith, based on the advice of the Financial Advisor or other nationally recognized investment banking firm, determines that the Acquisition Proposal is readily financeable. The Company will immediately cease and cause to be terminated any existing activities, discussions or negotiations by the Company or its Representatives with any parties conducted heretofore with respect to any of the foregoing, take the necessary steps to inform such parties of the obligations undertaken in this Section 7.2., and request that such parties promptly return all documents (and all copies thereof) furnished to them by the Company or its Representatives in connection with such activities, discussions and negotiations. Nothing in this Section 7.2 shall (i) permit the Company to terminate this Agreement (except as specifically provided in Article IX hereof), or (ii) affect any other obligation of the Company under this Agreement. For purposes of this Agreement, an Acquisition Proposal shall not be deemed to exist solely as a result of a person filing a report on Schedule 13G to report ownership of the Company Common Stock. (b) The Company shall (i) promptly notify the Parent in writing after receipt by the Company (or its Representatives) of any Acquisition Proposal or any inquiries indicating that any person is considering making or wishes to make an Acquisition Proposal and provide a copy of such Acquisition Proposal or, in connection with any non-written inquiries or Acquisition Proposal, provide a written statement setting forth in detail a description of the inquiry or the terms and conditions of the Acquisition Proposal, (ii) promptly notify the Parent in writing after receipt of any request for nonpublic information relating to it or REI Barbados or for access to its or REI Barbados' properties, books or records by any person that, to the knowledge of the Company's executive officers, may be considering making, or has made, an Acquisition Proposal and (iii) promptly keep the Parent advised of the status of any such Acquisition Proposal, indication or request including, without limitation, the identity of the party making such Acquisition Proposal, indication or request, and all terms relating to such Acquisition Proposal. (c) In no event will the Company provide any non-public information regarding the Company to any party making an Acquisition Proposal unless such party enters into a written confidentiality agreement containing provisions substantially similar to those contained in the Confidentiality Agreement. SECTION 7.3. Directors and Officers Indemnification and Insurance (a) From and after the Effective Time, the Parent shall cause the Surviving Corporation to and the Surviving Corporation shall indemnify, defend and hold harmless the present and former officers, directors, employees and agents of the Company (each a "Covered Person") against all losses, expenses, claims, damages, liabilities or amounts ("Losses") that are paid in settlement (provided that such settlement has been approved by the Parent, such approval not to be unreasonably withheld) of, or otherwise in connection with, any claim, action, suit, proceeding or investigation (a "Claim"), based in whole or in part on the fact that such person is or was a director, officer, employee or agent of the Company and arising out of actions or omissions occurring at or prior to the Effective Time (including, without limitation, the Transactions), in each case to the full extent permitted under the MBCA and the Company's articles of incorporation and bylaws as in effect on the date of this Agreement. The Surviving Corporation shall pay any expenses in advance of the final disposition of any such Claim to each Covered Person to the fullest extent permitted under the MBCA upon receipt from the Covered Person to whom expenses are advanced of an undertaking to repay such advances required under the MBCA. The Surviving Corporation shall cooperate in the defense of any such matter. (b) For a period of six years after the Closing Date (or in the event any Claim is asserted within such six year period, until final disposition of that Claim), the Parent shall cause the Surviving Corporation to keep in effect provisions in its articles of incorporation and bylaws providing for exculpation of director liability, advancing expenses prior to disposition of any Claim and its indemnification of the Covered Persons to the fullest extent permitted under the MBCA, which provisions shall not be amended except as required by applicable Law or except to make changes permitted by law that would enlarge the right of indemnification of the Covered Persons. (c) For a period of six (6) years after the Effective Time, the Parent shall cause the Surviving Corporation to maintain in effect the current policies of directors and officers liability insurance maintained by the Company covering persons who are currently covered by the Company's officers and directors liability insurance policies with respect to actions or omissions occurring at or prior to the Effective Time to the extent that such policies are available; provided, that policies of at least the same coverage containing terms and conditions which are no less advantageous to the insureds may be substituted therefor, provided, further, that in no event shall the Surviving Corporation be required to expend amounts for premiums per annum in excess of 150% of the current annual premiums for the twelve-month period ending November 15, 1999 (which premium the Company represents and warrants to be $107,500 in the aggregate for the policy year which began in November 1998) (the "Maximum Premium") to maintain or procure insurance coverage pursuant to this Section 6.3, or, if the cost of such coverage exceeds the Maximum Premium, the maximum amount of coverage that can be purchased for the Maximum Premium. (d) From and after the Effective Time, the Parent agrees to indemnify, defend and hold harmless the Covered Persons against all Losses that are paid in settlement (provided that such settlement has been approved by the Parent, such approval not to be unreasonably withheld) of, or otherwise in connection with, a Claim based in whole or in part on the fact that such Covered Person is or was a director or officer of the Company and arising out of actions or omissions occurring at or prior to the Effective Time (including, without limitation, the Transactions), in each case to the fullest extent permitted by applicable Law and whether or not the Surviving Corporation is permitted by applicable Law to provide any indemnity with respect to such Losses. The Parent shall pay any expenses in advance of the final disposition of any such Claim to each Covered Person to the fullest extent permitted by applicable Law upon receipt from the Covered Person to whom such expenses are advanced of an undertaking to repay such advances required under applicable Law. The Parent shall cooperate in the defense of any such matter. (e) If any Litigation described in this Section 7.3 (each, an "Action") arises or occurs, the Surviving Corporation shall control the defense of such Action with counsel selected by the Surviving Corporation, which counsel shall be reasonably acceptable to the party seeking indemnification pursuant to this Section 7.3 (each, an "Indemnified Party"); provided that the Indemnified Party shall be permitted to participate in the defense of such Action through counsel selected by the Indemnified Party, which counsel shall be reasonably acceptable to the Surviving Corporation, at the Indemnified Party's expense. Notwithstanding the foregoing, if there is any conflict between the Surviving Corporation and any Indemnified Parties or there are additional defenses available to any Indemnified Parties, the Indemnified Parties shall be permitted to participate in the defense of such Action with counsel selected by the Indemnified Parties, which counsel shall be reasonably acceptable to the Surviving Corporation, and the Indemnified Parties shall be indemnified therefor; provided that the Surviving Corporation shall not be obligated to pay the reasonable fees and expenses of more than one counsel for all Indemnified Parties in any single Action except to the extent that, in the opinion of counsel for the Indemnified Parties, two or more of such Indemnified Parties have conflicting interests in the outcome of such Action. The Surviving Corporation shall not be liable for any settlement effected without its written consent, which consent shall not be unreasonably withheld. (f) The provisions of this Section 7.3 shall survive the consummation of the Merger and expressly are intended to benefit each of the Covered Persons. SECTION 7.4. Notification of Certain Matters. The Parent shall give prompt notice to the Company, and the Company shall give prompt notice to the Parent, of (a) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would be likely to cause any covenant, condition or agreement contained in this Agreement or any Ancillary Document not to be complied with or satisfied and (b) any failure of the Parent or the Company, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 7.4 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. SECTION 7.5. Restructuring of Merger. Upon the mutual agreement of the Parent and the Company, the Merger shall be restructured in the form of a forward subsidiary merger of the Company into Merger Sub or any other affiliate of the Parent, with Merger Sub or such affiliate being the surviving corporation, or as a merger of the Company into the Parent, with the Parent being the surviving corporation. In such event, this Agreement shall be deemed appropriately modified to reflect such form of merger. SECTION 7.6. Company Shareholder Meeting. Subject to Section 3.5, the Company shall (i) call a meeting of its shareholders (the "Shareholders Meeting") for the purpose of voting upon the Merger, (ii) hold the Shareholders Meeting as soon as practicable following the termination or expiration of the Offer or the purchase of shares of Company Common Stock pursuant to the Offer, (iii) submit this Agreement and the transactions contemplated hereby for approval of the Company's shareholders at the Shareholders Meeting, and (iv) include in the Proxy Statement the recommendation of its Board of Directors that its shareholders approve this Agreement and the transactions contemplated hereby; provided, however, it need not include such recommendation if it has received a written opinion from outside counsel that such recommendation would violate the Board of Directors' fiduciary duties under applicable Law. If the Parent or Merger Sub purchases any Company Common Stock pursuant to the Offer, the record date for the Shareholders Meeting shall be a date subsequent to the date the Parent or Merger Sub becomes a record holder of Company Common Stock purchased pursuant to the Offer. SECTION 7.7. Proxy Statements. (a) If required by applicable Law, the Company will, as soon as practicable following the termination or expiration of the Offer, prepare and file a preliminary Proxy Statement (such proxy statement, and any amendments or supplements thereto, the "Proxy Statement") or, if applicable, an information statement with the SEC with respect to the Shareholders Meeting and will use its reasonable efforts to respond to any comments of the SEC or its staff and to cause the Proxy Statement to be cleared by the SEC as soon as practicable. The Company will notify the Parent of the receipt of any comments from the SEC or its staff and of any request by the SEC or its staff for amendments or supplements to the Proxy Statement or for additional information and will supply the Parent with copies of all correspondence between the Company or any of its representatives, on the one hand, and the SEC or its staff, on the other hand, with respect to the Proxy Statement or the Merger. The Company shall give the Parent and its counsel (who shall provide any comments thereon as soon as practicable) the opportunity to review the Proxy Statement prior to its being filed with the SEC and shall give the Parent and its counsel (who shall provide any comments thereon as soon as practicable) the opportunity to review all amendments and supplements to the Proxy Statement and all responses to requests for additional information and replies to comments prior to their being filed with, or sent to, the SEC. Each of the Company and the Parent agrees to use its reasonable efforts, after consultation with the other parties hereto, to respond promptly to all such comments of and requests by the SEC. As promptly as practicable after the Proxy Statement has been cleared by the SEC, the Company shall mail the Proxy Statement to the shareholders of the Company. If at any time prior to the approval of this Agreement by the Company's shareholders there shall occur any event that should be set forth in an amendment or supplement to the Proxy Statement, the Company will prepare and mail to its shareholders such an amendment or supplement. (b) The Company represents and warrants that the Proxy Statement will comply as to form in all material respects with the Exchange Act and, at the respective times filed with the SEC and distributed to shareholders of the Company, will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, that the Company makes no representation or warranty as to any information included in the Proxy Statement which was provided by the Parent or Merger Sub. The Parent represents and warrants that none of the information supplied by the Parent or Merger Sub for inclusion in the Proxy Statement will, at the respective times filed with the SEC and distributed to shareholders of the Company, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (c) The Company shall use its reasonable efforts to obtain the necessary approvals by its shareholders of this Agreement and the transactions contemplated hereby. (d) The Parent agrees, subject to applicable Law, to cause all shares of Company Common Stock purchased by Merger Sub and/or the Parent pursuant to the Offer and all other shares of Company Common Stock owned by the Parent, Merger Sub or any other Subsidiary or affiliate of the Parent to be voted in favor of the approval of this Agreement and the transactions contemplated hereby. SECTION 7.8. Further Action, Reasonable Efforts. (a) Upon the terms and subject to the conditions hereof, each of the parties hereto shall (i) make promptly its respective filings, and thereafter make any other required submissions, under the HSR Act with respect to the Transactions, and (ii) use reasonable efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws and regulations to consummate and make effective the transactions contemplated hereby, including, without limitation, using reasonable efforts to obtain all licenses, permits, consents, approvals, authorizations, qualifications and orders of Governmental Entities, make all filings and required submissions with Governmental Entities, including foreign filings and submissions, and obtain all consents and approvals from parties to Contracts with the Company and the Parent and their respective Subsidiaries as are necessary for the consummation of the transactions contemplated hereby; provided, however, that the Parent shall not be required by any provision of this Agreement to take any action, including entering into any consent decree that requires the divestiture of a material amount of assets of the Parent or any of its Subsidiaries. Each of the Parent and the Company shall, subject to the Parent's direction, use all its reasonable efforts to contest any proceeding seeking a preliminary injunction or other legal impediment to, and to resolve any objections as may be asserted by any Governmental Entity with respect to, the Offer and/or the Merger under the HSR Act or any other antitrust Laws; provided that the foregoing shall not require the Parent to take any action that is reasonably likely to result in any of the consequences specified in subsection (a) of Exhibit A. In case at any time after the Effective Time any other action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall use their reasonable efforts to take all such action. (b) Each party shall use its reasonable efforts not to take any action, or enter into any transaction, which would result in a breach of any covenant made by it in this Agreement. (c) Each party hereto shall, subject to the fulfillment at or before the Effective Time of each of the conditions of performance set forth herein or the waiver thereof, perform such further acts and execute such documents as may be reasonably required to effect the transactions contemplated hereby. SECTION 7.9. Public Announcements. The initial press release relating to this Agreement shall be a joint press release. Thereafter, the Company and the Parent shall consult with each other before issuing any press release or otherwise making any public statements with respect to this Agreement or any of the transactions contemplated hereby and shall not issue any such press release or make any such public statement without the prior consent of the other party, which consent shall not be unreasonably withheld or delayed; provided, however, that a party may, without the prior consent of the other party, issue such press release or make such public statement as may be required by Law or any listing agreement or arrangement to which the Company or the Parent is a party with a national securities exchange or The Nasdaq Stock Market if it has used all reasonable efforts to consult with the other party and to obtain such party's consent but has been unable to do so in a timely manner. SECTION 7.10. Employee Benefits. (a) For a period of at least two years after the Effective Time, the Parent will cause the Surviving Corporation to provide for the benefit of the employees of the Company and REI Barbados benefits in the aggregate that are (A) substantially equivalent to the benefits provided under Company Benefit Plans in effect on the date of this Agreement, or (B) if equal to or greater than the benefits described in clause (A) above, the benefits provided under benefit plans maintained by the Parent for employees of the Parent and the Parent Subsidiaries (other than the Surviving Corporation and its Subsidiaries). Without limiting the generality of the foregoing, all vacation, holiday, sickness and personal days accrued by the employees of the Company and REI Barbados shall be honored. For a period of at least two years after the Effective Time (or for such longer or shorter period as is permitted or required by applicable statute), the Parent will cause the Surviving Corporation to provide for the benefit of individuals who, immediately prior to the Effective Time, are former employees of the Company and REI Barbados with benefits that are substantially equivalent, in the aggregate, to the benefits that are provided to them immediately prior to the Effective Time under Company Benefit Plans. In the event that any employee of the Surviving Corporation or one of its Subsidiaries is at any time after the Effective Time transferred to the Parent or any affiliate of the Parent (other than the Surviving Corporation and its Subsidiaries) or becomes a participant in an employee benefit plan, program or arrangement maintained by or contributed by the Parent or any affiliate of the Parent (other than the Surviving Corporation and its Subsidiaries), the Parent shall cause such plan, program or arrangement to treat the prior service of such employee with the Company and REI Barbados prior to the Effective Time, to the extent prior service is generally recognized under such plan, program or arrangement of the Company, as service rendered to the Parent or such affiliates for purposes of eligibility, vesting or entitlement to benefits under such plans, program or arrangement (reduced, however, to avoid duplication of benefits for the same period of service). The Parent shall cause to be waived any pre-existing condition limitation under its benefit plans that might otherwise apply to such employee or, to the extent applicable, a former employee. The Parent agrees to recognize (or cause to be recognized) the dollar amount of all expenses incurred by such employees or, to the extent applicable, former employees, during the calendar year in which the Effective Time occurs for purposes of satisfying the calendar year deductibles and co-payment limitations for such year under the relevant benefit plans of the Parent and their respective Subsidiaries. (b) The Parent represents that its current intent is to cause the Surviving Corporation to maintain its principal production facility in the Minneapolis, Minnesota metropolitan area for a period of at least two years after the Effective Time. (c) With respect to the employees of the Company and REI Barbados set forth on Section 7.10(c) of the Company Disclosure Letter, the Parent will cause the Surviving Corporation to maintain and fund the Company's incentive bonus plan as in effect on the date hereof (the "Current Plan") through the performance period ending December 31, 1999. For the performance period ending December 31, 1999, the portion of such bonuses that are based on the Company's operating income (the "Company Performance Component") shall not be less than 80% of the maximum amount of the Company Performance Component as described in such plan. If an employee is terminated without cause prior to December 31, 1999, such employee shall be paid such bonus in an amount pro rated according to the period of the employee's service to the Company during 1999. Effective January 1, 2000, the Current Plan shall terminate, and the employees of the Company and REI Barbados set forth on Schedule 7.10(c) shall commence to participate in the Parent's incentive bonus plan (the "Parent Plan") and shall be entitled to an award from the Parent Plan which reflects (i) the actual period of participation of such employees in the Parent Plan and (ii) the actual performance of the applicable business unit during such period. SECTION 7.11. Confidentiality Agreement. The Company hereby waives the provisions of the Confidentiality Agreement as and to the extent necessary to permit the consummation of the transactions contemplated hereby. Upon acceptance of the shares of Company Common Stock pursuant to the Offer, the Confidentiality Agreement shall be deemed to have terminated without further action by the parties hereto. ARTICLE VIII CONDITIONS TO THE MERGER SECTION 8.1. Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of each party to this Agreement to effect the Merger shall be subject to the following conditions: (a) The waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated. (b) None of the parties hereto shall be subject to any order or injunction of a court of competent jurisdiction which prohibits the consummation of the transactions contemplated by this Agreement. (c) If required by applicable Law, this Agreement and the Merger shall have been approved by the shareholders of the Company in accordance with the MBCA and the Company's articles of incorporation and bylaws. SECTION 8.2. Conditions to Obligations of the Company to Effect the Merger. The obligations of the Company to effect the Merger are subject to the satisfaction of the following conditions, unless waived by the Company: (a) The representations and warranties of the Parent and Merger Sub contained herein that are qualified as to materiality shall be true and correct, and those not so qualified shall be true and correct in all material respects, in each case at and as of the Effective Time with the same force and effect as though made at and as of the Effective Time (except to the extent a representation or warranty speaks specifically as of an earlier date or except as contemplated by this Agreement). (b) The Parent and Merger Sub have performed, in all material respects, all obligations and complied, in all material respects, with all covenants required by this Agreement to be performed or complied with by them prior to the Effective Time. (c) The Parent shall have delivered to the Company a certificate, dated the Effective Time and signed by an executive officer of Parent, evidencing compliance with Sections 8.2(a) and (b). SECTION 8.3. Conditions to Obligations of the Parent and Merger Sub to Effect the Merger. The obligations of the Parent and Merger Sub to effect the Merger are subject to the satisfaction of the following conditions, unless waived by the Parent and Merger Sub: (a) The representations and warranties of the Company contained herein that are qualified as to materiality shall be true and correct, and those not so qualified shall be true and correct in all material respects, in each case at and as of the Effective Time with the same force and effect as though made at and as of the Effective Time (except to the extent a representation or warranty speaks specifically as of an earlier date or except as contemplated by this Agreement). (b) The Company shall have performed, in all material respects, all obligations and complied, in all material respects, with all covenants required by this Agreement to be performed or complied with by it prior to the Effective Time. (c) The Company shall have delivered to the Parent a certificate, dated the Effective Time and signed by an executive officer of the Company, evidencing compliance with Sections 8.3(a) and (b). (d) Merger Sub and/or the Parent shall have accepted for payment and paid for all of the shares of Company Common Stock tendered pursuant to the Offer. ARTICLE IX TERMINATION WAIVER, AMENDMENT AND CLOSING SECTION 9.1. Termination. This Agreement may be terminated and abandoned at any time prior to the Effective Time, whether before or after approval of this Agreement, the Merger and the other Transactions by the shareholders of the Company: (a) by the mutual written consent of the Company and the Parent; (b) by the Company or the Parent, if (i) the Effective Time shall not have occurred on or before 180 days from the date hereof, provided, however, that the right to terminate this Agreement pursuant to clause (i) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date, (ii) any Governmental Entity, the consent of which is a condition to the obligations of the Company and the Parent to consummate the transactions contemplated hereby, shall have determined not to grant its consent and all appeals of such determination shall have been taken and have been unsuccessful, (iii) any court of competent jurisdiction shall have issued an order, judgment or decree (other than a temporary restraining order) restraining, enjoining or otherwise prohibiting the Merger and such order, judgment or decree shall have become final and nonappealable, or (iv) upon a vote at a duly held meeting or upon an adjournment thereof, the shareholders of the Company shall have failed to approve the Merger or give any approval required by the applicable Law in connection therewith. (c) by the Company, if prior to Merger Sub and/or the Parent having purchased any shares of Company Common Stock under the Offer, the Board of Directors of the Company shall concurrently approve, and the Company shall concurrently enter into, a definitive agreement providing for the implementation of a Superior Proposal; provided, however, that (i) the Company is not then in breach of Section 7.2, (ii) no termination pursuant to this Section 9.1(c) shall be effective unless the Company shall simultaneously make the payment required by Section 9.3, and (iii) the Company has provided to the Parent and Merger Sub three business days' notice of its intent to so terminate the Agreement and, with such notice, delivered to the Parent and Merger Sub a copy of the written agreement embodying the Acquisition Proposal in its then most definitive form; and (d) by the Parent, (i) upon the termination or expiration of the Offer without the purchase of any Company Common Stock thereunder if the Minimum Condition shall not have been satisfied; (ii) the failure of any condition specified in subsections (a) through (f) of Exhibit A prior to Merger Sub and/or the Parent having purchased any shares of Company Common Stock under the Offer, regardless of whether the Offer is made, which failure either continues through, or cannot in the Parent's reasonable judgment be cured prior to, the date the Offer is scheduled to expire (if the Offer has been commenced) or, if the Offer has not commenced, would be scheduled to expire if it were commenced on the business day after the date hereof (provided that the right to terminate this Agreement pursuant to this clause (d)(ii) shall not be available to the Parent if the Parent's failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of any such condition); or (iii) the Board of Directors shall have modified or amended its recommendation of the Offer or the Merger in any manner adverse to the Parent or Merger Sub or shall have withdrawn or failed to confirm within five business days of the Parent's request therefor its recommendation of the Offer or the Merger or shall have recommended acceptance of any Acquisition Proposal or shall have resolved to do any of the foregoing. SECTION 9.2. Effect of Termination. In the event of termination of this Agreement by the Company or the Parent as provided in Section 9.1 hereof, this Agreement shall forthwith become void (except for the last sentence of Section 1.3(c), the last sentence of Section 7.1(a), Sections 9.3, 10.2, 10.4, 10.6, 10.7 and 10.8 and this Section 9.2) and there shall be no liability on the part of the Company, the Parent, Merger Sub or their respective officers or directors, except for any breach of a party's obligations under such provisions. Notwithstanding the foregoing, no party hereto shall be relieved from liability for any willful, material breach of this Agreement. SECTION 9.3. Termination Fee. If this Agreement is terminated: (i) by the Company pursuant to Section 9.1(c), then the Company shall pay to the Parent on the next business day following the date of such termination, the Termination Fee; (ii) by the Parent pursuant to Section 9.1(d)(iii), then the Company shall pay to the Parent on the next business day following the date of such termination, the Termination Fee; and (iii) by the Parent pursuant to Section 9.1(d)(i), and (x) at the time of such termination an Acquisition Proposal is outstanding and (y) during the term of this Agreement or within 12 months after the termination of this Agreement, the Board of Directors recommends an Acquisition Proposal or the Company enters into an agreement providing for an Acquisition Proposal or a transaction contemplated by an Acquisition Proposal occurs, then on the next business day following the earliest of the recommendation of an Acquisition Proposal, the entering into of an agreement providing for an Acquisition Proposal or the occurrence of the transaction contemplated by an Acquisition Proposal, the Company shall pay to the Parent the Termination Fee. "Termination Fee" shall mean $11,865,000. SECTION 9.4. Amendment or Supplement. At any time before or after approval of this Agreement and the Transactions by the shareholders of the Company and prior to the Effective Time, this Agreement may be amended or supplemented in writing by the Company (subject to Section 1.4(b)) and the Parent with respect to any of the terms contained in this Agreement, except that following approval by the shareholders of the Company there shall be no amendment or supplement which by Law requires further approval by such shareholders without further approval by the shareholders of the Company. SECTION 9.5. Extension of Time, Waiver, Etc. At any time prior to the Effective Time, the Company and the Parent may: (a) extend the time for the performance of any of the obligations or acts of the other party; (b) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered pursuant hereto; or (c) waive compliance with any of the agreements or conditions of the other party contained herein; provided, however, that no failure or delay by the Company or the Parent in exercising any right hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right hereunder. Any agreement on the part of a party hereto to any extension or waiver contemplated by this Section 9.5 shall be valid only if set forth in an instrument in writing signed on behalf of such party. ARTICLE X MISCELLANEOUS SECTION 10.1. No Survival of Representations and Warranties. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Merger or the termination of this Agreement pursuant to Article IX. SECTION 10.2. Expenses. Except as provided in Article IX, whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses, except that the expenses incurred in connection with printing the Offer Documents, the Schedule 14D-9 and the Proxy Statement shall be paid in equal shares by the Company and the Parent. SECTION 10.3. Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered the same agreement. SECTION 10.4. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota, without regard to the principles of conflicts of laws thereof. SECTION 10.5. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered by hand, mailed by registered or certified mail (return receipt requested) or sent by prepaid overnight courier (with proof of service) or confirmed to facsimile to the parties as follows (or at such other addresses for a party as shall be specified by like notice) and shall be deemed given on the date on which so hand-delivered, or sent by confirmed telecopier and on the day after it has been so mailed or sent by courier: To the Parent or Merger Sub: The Procter and Gamble Company One Procter and Gamble Plaza Cincinnati, OH 45202 Facsimile: (513) 983-9379 Attention: Treasurer with a copy (which shall not constitute notice) to: Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, NY 10004 Facsimile: (212) 859-4000 Attention: Stephen Fraidin (P.C.) To the Company: Recovery Engineering, Inc. 9300 North 75th Street Minneapolis, MN 55428 Facsimile: (612) 315-5508 Attention: Chief Executive Officer with a copy (which shall not constitute notice) to: Robins, Kaplan, Miller & Ciresi L.L.P. 2800 LaSalle Plaza 800 LaSalle Avenue Minneapolis, Minnesota 55402 Facsimile: (612) 339-4181 Attention: Eric O. Madson, Esq. SECTION 10.6. Miscellaneous. (a) This Agreement, together with the exhibit hereto, the Company Disclosure Letter, the Confidentiality Agreement, the Ancillary Documents and the Tender and Option Agreement, constitutes the entire agreement, and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof and thereof. (b) This Agreement, except for the provisions of Article II and Section 7.3, is not intended to and shall not confer upon any person other than the parties hereto any rights or remedies hereunder or by reason hereof. (c) This Agreement shall not, nor shall any of the rights or interests hereunder, be assigned by any party hereto or be assignable by operation of law or otherwise without the prior written consent of the other parties; provided, however, that either the Parent or Merger Sub (or both) may assign its rights hereunder (including, without limitation, the right to make the Offer and/or purchase shares of Company Common Stock in the Offer) to an affiliate, but nothing shall relieve the assignor from its obligations hereunder. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit to the parties hereto and their respective successors and assigns. (d) The headings contained in this Agreement are for reference purposes and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 10.7 Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. SECTION 10.8. Enforcement of Agreement. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with its specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court, this being in addition to any other remedy to which they are entitled at law or in equity. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first above written. RECOVERY ENGINEERING, INC. /s/ Brian F. Sullivan By:__________________________________ Name: Brian F. Sullivan Title: Chief Executive Officer THE PROCTER AND GAMBLE COMPANY /s/ Gretchen W. Price By:__________________________________ Name: Gretchen W. Price Title: Treasurer TENZING, INC. /s/ Gretchen W. Price By:__________________________________ Name: Gretchen W. Price Title: Vice President and Treasurer EXHIBIT A CONDITIONS OF THE OFFER Notwithstanding any other term of the Offer or this Agreement, Merger Sub shall not be required to accept for payment or pay for, subject to any applicable rules and regulations of the SEC, including Rule 14e-l(c) of the Exchange Act, any shares of Company Common Stock not theretofore accepted for payment or paid for and may terminate or amend the Offer as to such shares of Company Common Stock unless (i) there shall have been validly tendered and not withdrawn prior to the expiration of the Offer that number of shares of Company Common Stock which would represent at least a majority of the outstanding shares of Company Common Stock on a fully diluted basis (the "Minimum Condition") and (ii) any waiting period under the HSR Act applicable to the purchase of shares of Company Common Stock pursuant to the Offer shall have expired or been terminated. Furthermore, notwithstanding any other term of the Offer or this Agreement, Merger Sub shall not be required to accept for payment or, subject as aforesaid, to pay for any shares of Company Common Stock not theretofore accepted for payment or paid for, and may terminate or amend the Offer if at any time on or after the date of this Agreement and before the acceptance of such shares of Company Common Stock for payment or the payment therefor, any of the following conditions exist or shall occur and remain in effect at the scheduled expiration of the Offer: (a) there shall have been instituted or pending any litigation before any court or other Governmental Entity which seeks to or, if successful, would (i) challenge or restrict the acquisition by the Parent or Merger Sub (or any of its affiliates) of shares of Company Common Stock pursuant to the Offer or the Merger, restrain, prohibit or delay the making or consummation of the Offer or the Merger, or obtain any damages in connection therewith, (ii) make the purchase of or payment for some or all of the shares of Company Common Stock pursuant to the Offer or the Merger illegal or otherwise restrict or prohibit consummation of the Offer or the Merger, (iii) impose limitations on the ability of the Parent or Merger Sub (or any of their affiliates) effectively to acquire, operate or hold, or require the Parent, Merger Sub or Company or any of their respective affiliates or Subsidiaries to dispose of or hold separate, any portion of the assets or the business of any one of them or their Subsidiaries or affiliates, (iv) impose limitations on the ability of the Parent, Merger Sub or their affiliates to exercise full rights of ownership of the shares of Company Common Stock acquired by it pursuant to the Offer or the Merger, including, without limitation, the right to vote the shares acquired by it on all matters properly presented to the shareholders of the Company, (v) restrict any future business activity by the Parent, Merger Sub, the Company or any of their affiliates, including, without limitation, requiring the prior consent of any person or entity (including any Governmental Entity) to future transactions by the Parent, Merger Sub, the Company or any of their affiliates, or (vi) otherwise affect the Parent, Merger Sub, the Company or any of their respective affiliates, which, in each such case described in (i) through (vi), is reasonably likely to have a Company Material Adverse Effect or a Parent Material Adverse Effect or otherwise make consummation of the Offer or the Merger unduly burdensome; or (b) there shall have been promulgated, enacted, entered, enforced or deemed applicable to the Offer or the Merger, by any Governmental Entity, any Law (other than the HSR Act) that is reasonably likely to result in any of the consequences referred to in subsection (a) above; or (c) this Agreement shall have been terminated in accordance with its terms; or (d) (i) any of the representations and warranties made by the Company in this Agreement or in any Ancillary Document (which for purposes of this clause (d) shall be read as though none of them contained any Material Adverse Effect or materiality qualifications) shall not have been true and correct in all respects when made, or shall thereafter have ceased to be true and correct in all respects as if made as of such later date (other than representations and warranties made as of a specified date), except where the failure of the representations and warranties to be true and correct in all respects would not in the aggregate have a Company Material Adverse Effect, or (ii) the Company shall have breached or failed to comply in any material respect with any of its obligations under this Agreement; or (e) the Board of Directors shall have modified or amended its recommendation of the Offer or the Merger in any manner adverse to the Parent or Merger Sub or shall have withdrawn or failed to confirm within five business days of the Parent's request therefor its recommendation of the Offer or the Merger or shall have recommended acceptance of any Acquisition Proposal or shall have resolved to do any of the foregoing; or (f) any change, new event or development shall have occurred or be threatened which, either individually or in the aggregate, would or is likely in the future to have a Company Material Adverse Effect, other than changes in general economic, financial, regulatory, political or market conditions. The foregoing conditions are for the sole benefit of the Parent and Merger Sub and may be asserted by the Parent or Merger Sub with respect to the consummation of the Offer regardless of the circumstances giving rise to any such condition (other than any action or inaction by the Parent or Merger Sub) and may be waived by the Parent or Merger Sub, in whole or in part, at any time and from time to time, in the reasonable discretion of the Parent subject to the terms of the Agreement. The failure by the Parent or Merger Sub at any time to exercise any of the foregoing rights will not be deemed a waiver of any right, the waiver of such right with respect to any particular facts or circumstances shall not be deemed a waiver with respect to any other facts or circumstances, and each right will be deemed an ongoing right which may be asserted at any time and from time to time. Should the Offer be terminated pursuant to the foregoing provisions, all tendered shares of Company Common Stock not theretofore accepted for payment shall forthwith be returned by the Paying Agent to the tendering shareholders. EX-99.(C)(2) 12 TENDER AND OPTION AGREEMENT DATED AS OF 8/26/1999 ================================ TENDER AND OPTION AGREEMENT among THE PROCTER AND GAMBLE COMPANY, TENZING, INC. and THE STOCKHOLDERS LISTED ON SCHEDULE A Dated as of August 26, 1999 ================================ TENDER AND OPTION AGREEMENT TENDER AND OPTION AGREEMENT, dated as of August 26, 1999 (this "Agreement"), among The Procter and Gamble Company, an Ohio corporation --------- ("Purchaser"), Tenzing, Inc., a Minnesota corporation and a wholly owned --------- subsidiary of Purchaser ("Merger Sub"), and each of the persons listed on ---------- Schedule A hereto (each a "Stockholder" and, collectively, the "Stockholders"). ----------- ------------ RECITALS WHEREAS, Purchaser, Merger Sub and Recovery Engineering, Inc., a Minnesota corporation (the "Company"), have entered into an Agreement and Plan ------- of Merger dated as of the date hereof (as the same may be amended or supplemented, the "Merger Agreement") providing for, among other things, an ---------------- Offer by Merger Sub for all of the issued and outstanding shares of common stock, par value $0.01 per share, of the Company (the "Company Common Stock"), -------------------- and, subsequent thereto, assuming the Offer is consummated on the terms set forth in the Offer Documents and all the other conditions to the Merger are satisfied or waived, the Merger of Merger Sub with and into the Company with the Company as the surviving corporation in the Merger, pursuant to which the Company will become a wholly owned subsidiary of Purchaser; WHEREAS, each Stockholder is the beneficial owner of the shares of Company Common Stock, Options, Warrants, and Rights set forth opposite such Stockholder's name on Schedule A hereto (collectively referred to herein as the "Securities" of such Stockholder; such Securities, as such Securities may be ---------- adjusted by stock dividend, stock split, recapitalization, combination or exchange of shares, merger, consolidation, reorganization or other change or transaction of or by the Company, together with shares of Company Common Stock issuable upon the exercise of Options, Warrants, and shares of Company Common Stock issuable upon the exercise of Rights being referred to herein as the "Shares" of such Stockholder); and ------ WHEREAS, as a condition to each of Purchaser and Merger Sub's willingness to enter into the Merger Agreement, Purchaser and Merger Sub have requested that the Stockholders enter into, and the Stockholders have agreed to enter into, this Agreement; NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the parties agree as follows: Section 1. Certain Definitions. Capitalized terms used but not otherwise ------------------- defined herein have the meanings ascribed to such terms in the Merger Agreement. Section 2. Representations and Warranties of the Stockholders. Each -------------------------------------------------- Stockholder, severally and not jointly, represents and warrants to Purchaser and Merger Sub, as of the date hereof and as of the Closing (as defined below), as follows: (a) The Stockholder is the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of, and has good title to, all of the Securities set forth opposite such Stockholder's name on Schedule A, free and clear of any ---------- pledge, hypothecation, claim, security interest, charge, encumbrance, voting trust agreement, interest, option, lien, charge or similar restriction or limitation, including any restriction on the right to vote, sell or otherwise dispose of the Securities, other than those arising under the federal and state securities laws (each, a "Lien"), except as set forth in this Agreement. ---- (b) The Securities constitute all of the securities (as defined in Section 3(a)(10) of the Exchange Act) of the Company beneficially owned, directly or indirectly, by the Stockholder. (c) Except for the Securities, the Stockholder does not, directly or indirectly, beneficially own or have any option, warrant or other right to acquire any securities of the Company that are or may by their terms become entitled to vote or any securities that are convertible or exchangeable into or exercisable for any securities of the Company that are or may by their terms become entitled to vote, nor is the Stockholder subject to any contract, commitment, arrangement, understanding, restriction or relationship (whether or not legally enforceable), other than this Agreement, that provides for such Stockholder to vote or acquire any securities of the Company. The Stockholder holds exclusive power to vote the Company Common Stock set forth opposite its name on Schedule A, if any, and has not granted a proxy to any other person to vote any Company Common Stock (including those issuable upon exercise of the Options, Warrants or Rights), subject to the limitations set forth in this Agreement. (d) This Agreement has been duly executed and delivered by the Stockholder, and assuming the due authorization, execution and delivery thereof by the other parties hereto, constitutes the legal, valid and binding obligation of the Stockholder, enforceable against the Stockholder in accordance with its terms, except as enforcement against the Stockholder may be limited by bankruptcy, insolvency, moratorium or other similar laws relating to creditors rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). (e) Neither the execution and delivery of this Agreement nor the performance by the Stockholder of the Stockholder's obligations hereunder will conflict with, result in a violation or breach of, or constitute a default (or an event that, with notice or lapse of time or both, would result in a default) or give rise to any right of termination, amendment, cancellation, or acceleration or result in the creation of any Lien on any Shares under, (i) any contract, commitment, agreement, understanding, arrangement or restriction of any kind to which the Stockholder is a party or by which the Stockholder is bound or (ii) any injunction, judgment, writ, decree, order or ruling applicable to the Stockholder, except for conflicts, violations, breaches, defaults, terminations, amendments, cancellations, accelerations or Liens that would not individually or in the aggregate be expected to prevent or materially impair or delay the consummation by such Stockholder of the transactions contemplated hereby. (f) Neither the execution and delivery of this Agreement nor the performance by the Stockholder of the Stockholder's obligations hereunder will (i) violate any Law applicable to the Stockholder or require any order, consent, authorization or approval of, filing or registration with, or declaration or notice to, any court, administrative agency or other governmental body or authority, other than any required notices or filings pursuant to the HSR Act, foreign antitrust or competition laws or the federal securities laws, or (ii) if the Stockholder is not a natural person, conflict with or violate the articles of incorporation or bylaws or equivalent organizational documents of such Stockholder. (g) No investment banker, broker, finder or other intermediary is, or will be, entitled to a fee or commission from Merger Sub, Purchaser or the Company in respect of this Agreement based on any arrangement or agreement made by or on behalf of such Stockholder in this Agreement or otherwise in his or her capacity as a stockholder of the Company. (h) The Stockholder understands and acknowledges that Purchaser is entering into, and causing Merger Sub to enter into, the Merger Agreement in reliance upon the Stockholder's execution and delivery of this Agreement. (i) If the Stockholder is not a natural person, such Stockholder is a corporation, partnership or other legal entity duly incorporated or organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization. (j) If the Stockholder is not a natural person, (i) such Stockholder has all necessary corporate or partnership power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereunder, and (ii) the execution and delivery of this Agreement by such Stockholder and the consummation by such Stockholder of the transactions contemplated hereunder have been duly and validly authorized by all necessary corporate or other action and no other corporate or other proceedings on the part of such Stockholder are necessary to authorize this Agreement or to consummate the transactions contemplated hereunder. Section 3. Representations and Warranties of Purchaser and Merger Sub. ---------------------------------------------------------- Purchaser and Merger Sub hereby make each of the representations and warranties contained in Sections 5.1, 5.3 and 5.4 of the Merger Agreement, as if such representations and warranties were set forth herein. Section 4. Transfer of the Shares. During the term of this Agreement, ---------------------- except as otherwise expressly provided herein, each Stockholder agrees that such Stockholder will not (a) tender into any tender or exchange offer or otherwise sell, -3- transfer, pledge, assign, hypothecate or otherwise dispose of (including by operation of Law), or create any Lien on, any of the Shares, (b) deposit the Shares into a voting trust, enter into a voting agreement or arrangement with respect to the Shares or grant any proxy or power of attorney with respect to the Shares, (c) enter into any contract, option or other arrangement (including any profit sharing arrangement) or undertaking with respect to the direct or indirect acquisition or sale, transfer, pledge, assignment, hypothecation or other disposition of any interest in or the voting of any Shares or any other securities of the Company, (d) exercise any rights (including, without limitation, under Section 302A.473 of the Minnesota Business Corporation Act) to demand appraisal of any Shares which may arise with respect to the Merger, or (e) take any other action that would in any way restrict, limit or interfere with the performance of such Stockholder's obligations hereunder or the transactions contemplated hereby or which would otherwise diminish the benefits of this Agreement to Purchaser or Merger Sub. Section 5. Adjustments. (a) In the event (i) of any stock dividend, ----------- stock split, recapitalization, reclassification, combination or exchange of shares of capital stock or other securities of the Company on, of or affecting the Shares or the like or any other action that would have the effect of changing a Stockholder's ownership of the Company's capital stock or other securities or (ii) a Stockholder becomes the beneficial owner of any additional Shares of or other securities of the Company, then the terms of this Agreement will apply to the shares of capital stock and other securities of the Company held by such Stockholder immediately following the effectiveness of the events described in clause (i) or such Stockholder becoming the beneficial owner thereof, as described in clause (ii), as though they were Shares hereunder. (b) Each Stockholder hereby agrees, while this Agreement is in effect, to promptly notify Purchaser and Merger Sub of the number of any new Shares acquired by such Stockholder, if any, after the date hereof. Section 6. Tender of Shares of Company Common Stock. Each Stockholder ---------------------------------------- hereby agrees that such Stockholder will validly tender (or cause the record owner of such shares to validly tender) and sell (and not withdraw, except in the event the Purchase Option is exercised, in which case such withdrawal shall be for the limited purpose of consummating the Purchase Option) pursuant to and in accordance with the terms of the Offer not later than the fifth business day after commencement of the Offer (or the earlier of the expiration date of the Offer and the fifth business day after such shares of Company Common Stock are acquired by such Stockholder if the Stockholder acquires shares of Company Common Stock after the date hereof), or, if the Stockholder has not received the Offer Documents by such time, within two business days following receipt of such documents, all of the then outstanding shares of Company Common Stock beneficially owned by such Stockholder (including the shares of Company Common Stock outstanding as of the date hereof and shares of Company Common Stock issued following the exercise (if any) of the Options, Warrants, and Rights, in each case as set forth on Schedule A hereto opposite such Stockholder's name). Upon the purchase by Purchaser or Merger Sub of all of such then outstanding shares of Company Common Stock beneficially owned by such Stockholder pursuant to the Offer in accordance with this Section 6, this Agreement will terminate as it relates to such Stockholder. In the event, notwithstanding the provisions of the first sentence of this Section 6, any shares of Company Common Stock beneficially owned by a Stockholder are for any reason withdrawn from the Offer or are not purchased pursuant to the Offer, such shares of Company Common Stock will remain subject to the terms of this Agreement. Each Stockholder acknowledges that Purchaser's obligation to accept for payment and pay for the shares of Company Common Stock tendered in the Offer is subject to all the terms and conditions of the Offer. Section 7. Voting Agreement. Each Stockholder, by this Agreement, does ---------------- hereby (a) agree to appear (or not appear, if requested by Purchaser or Merger Sub) at any annual, special, postponed or adjourned meeting of the stockholders of the Company or otherwise cause the shares of Company Common Stock such Stockholder beneficially owns to be counted as present (or absent, if requested by Purchaser or Merger Sub) thereat for purposes of establishing a quorum and to vote or consent, and (b) constitute and appoint Purchaser and Merger Sub, or any nominee thereof, with full power of substitution, during and for the term of this Agreement, as his true and lawful attorney and proxy for and in his name, place and stead, to vote all the shares of Company Common Stock such Stockholder beneficially owns at the time of such vote, at any annual, special, postponed or adjourned meeting of the stockholders of the Company (and this appointment will include the right to sign his or its name (as stockholder) to any consent, certificate or other document relating to the Company that the laws of the State of Minnesota may require or permit), in the case of both (a) and (b) above, (x) in favor of approval and adoption of the Merger Agreement and approval and adoption of the Merger and the other transactions contemplated thereby and (y) against (1) any Acquisition Proposal (other than the Merger and the other transactions contemplated thereby), (2) any action or agreement that would result in a breach in any respect of any covenant, agreement, representation or warranty of the Company under the Merger Agreement and (3) any other action that is intended, or could be expected, to impede, interfere with, delay, postpone, or adversely affect the Offer, the Merger and the other transactions contemplated by this Agreement, the Merger Agreement and the Ancillary Documents. This proxy and power of attorney is a proxy and power coupled with an interest, and each Stockholder declares that it is irrevocable until this Agreement shall terminate in accordance with its terms. Each Stockholder hereby revokes all and any other proxies with respect to the Shares that such Stockholder may have heretofore made or granted. For shares of Company Common Stock as to which a Stockholder is the beneficial but not the record owner, such Stockholder shall use his or its best efforts to cause any record owner of such Shares to grant to Purchaser a proxy to the same effect as that contained herein. Each Stockholder hereby agrees to permit Purchaser and Merger Sub to publish and disclose in the Offer Documents and the Proxy Statement and related filings under the securities laws such Stockholder's identity -5- and ownership of Shares and the nature of his or its commitments, arrangements and understandings under this Agreement. Section 8. No Solicitation. Each Stockholder agrees that neither such --------------- Stockholder nor any of such Stockholder's officers, directors, employees, trustees, representatives, agents or affiliates (including, without limitation, any investment banker, attorney or accountant retained by any of them) will directly or indirectly initiate, solicit or encourage (including by way of furnishing non-public information or assistance), or take any other action to facilitate, any inquiries or the making or submission of any Acquisition Proposal, or enter into or maintain or continue discussions or negotiate with any person or entity in furtherance of such inquiries or to obtain or induce any person to make or submit an Acquisition Proposal or agree to or endorse any Acquisition Proposal or assist or participate in, facilitate or encourage, any effort or attempt by any other person or entity to do or seek any of the foregoing or authorize or permit any of its officers, directors, employees, trustees or any of its affiliates or any investment banker, financial advisor, attorney, accountant or other representative or agent retained by any of them to take any such action. Each Stockholder shall promptly advise Purchaser in writing of the receipt of request for information or any inquiries or proposals relating to an Acquisition Proposal. Section 9. Grant of Purchase Option. The Stockholder hereby grants to ------------------------ Purchaser and Merger Sub an irrevocable option (the "Purchase Option") to --------------- purchase for cash at a price (the "Exercise Price") set forth below, in a manner -------------- set forth below, any or all of the Shares (and including Shares acquired after the date hereof by such Stockholder) beneficially owned by the Stockholder. The Exercise Price for shares of Company Common Stock shall be equal to the Merger Consideration. The Exercise Price as it relates to the Options and Warrants shall be an amount in cash equal to the excess, if any, of the Merger Consideration over the per share exercise price of such Option or Warrant, without interest. To the extent that the per share exercise or conversion price of any Option or Warrant exceeds the Merger Consideration, such Option or Warrant shall be canceled and the Stockholder shall not receive or be entitled to receive any consideration from Purchaser, Merger Sub or the Company relating thereto. The Rights associated with any shares of Company Common Stock transferred pursuant to this Agreement will be transferred with such shares of Company Common Stock without payment of any additional consideration therefor. In the event of any stock dividends, stock splits, recapitalizations, combinations, exchanges of shares or the like, the Exercise Price will be appropriately adjusted for the purpose of this Section 9. The amount payable pursuant to this Section 9 shall be subject to all applicable withholding taxes. Section 10. Exercise of Purchase Option. --------------------------- (a) Subject to the conditions set forth in Section 12 hereof, the Purchase Option may be exercised by Purchaser or Merger Sub, in whole or in part, at any time or from time to time after the occurrence of any Trigger Event (as defined below). Each Stockholder shall notify Purchaser promptly in writing of the occurrence of any Trigger Event, it being understood that the giving of such notice by the Stockholder is not a condition to the right of Purchaser or Merger Sub to exercise the Purchase Option. In the event Purchaser or Merger Sub wishes to exercise the Purchase Option, Purchaser shall deliver to each Stockholder a written notice (an "Exercise Notice") specifying the total number --------------- of Shares it wishes to purchase from such Stockholder. Each closing of a purchase of Shares (a "Closing") will occur at a place, on a date and at a time ------- designated by Purchaser or Merger Sub in an Exercise Notice delivered at least two business days prior to the date of the Closing. (b) A "Trigger Event" means any one of the following: (i) the Merger ------------- Agreement becomes terminable under circumstances that entitle Purchaser or Merger Sub to receive the Termination Fee under Section 9.3 of the Merger Agreement (regardless of whether the Merger Agreement is actually terminated and whether such Termination Fee is then actually paid) or (ii) the Offer is consummated but, due to the failure of the Stockholder to validly tender and not withdraw all of the then outstanding shares of Company Common Stock beneficially owned by such Stockholder, the Purchaser has not accepted for payment or paid for all of such shares of Company Common Stock. (c) If requested by Purchaser and Merger Sub in the Exercise Notice, such Stockholder shall exercise and/or convert all Options and Warrants (to the extent exercisable and convertible) and other rights (including conversion or exchange rights), other than Options and Warrants with exercise or conversion prices above the Merger Consideration, beneficially owned by such Stockholder, and shall, if directed by Purchaser and Merger Sub, tender the shares of Company Common Stock acquired pursuant to such exercise or conversion into the Offer or sell such shares of Company Common Stock to Purchaser or Merger Sub as provided in this Agreement. (d) In the event that, within 12 months of the exercise of the Purchase Option, Purchaser sells, to a third party which is not an affiliate of Purchaser, Shares acquired by means of exercise of the Purchase Option ("Exercise Shares") for an aggregate consideration (the "Aggregate --------------- --------- Consideration") greater than the aggregate Exercise Price (the "Aggregate - ------------- --------- Exercise Price") paid for such Shares, Purchaser agrees to pay to the - -------------- Stockholders an amount equal to the excess of the Aggregate Consideration over the Aggregate Exercise Price. Each Stockholder shall be entitled to the proportion of such excess equal to proportion of the total number of Exercise Shares which were acquired from such Stockholder. In addition, in the event that, within 12 months of the exercise of the Purchase Option, Purchaser shall consummate a merger agreement with the Company, or shall purchase Shares pursuant to a tender offer for all Shares, at a price per share (taking into account any stock dividends, stock splits, recapitalizations, combinations, exchanges of shares or the like or any other action that would have the effect of changing Purchaser's ownership of the Company's -7- capital stock or other securities) in excess of the Exercise Price, Purchaser agrees to pay each Stockholder such excess for each Exercise Share purchased from such Stockholder. Section 11. Termination. This Agreement will terminate (a) pursuant to ----------- Section 6 or (b) upon the earliest of: (i) the Effective Time; (ii) termination of the Merger Agreement in accordance with its terms other than upon, during the continuance of, or after, a Trigger Event or an event which could lead to a Trigger Event; or (iii) 120 days following any termination of the Merger Agreement upon, during the continuance of or after a Trigger Event (or if, at the expiration of such 120 day period the Purchase Option cannot be exercised by reason of any applicable judgment, decree, order, injunction, law or regulation, 10 business days after such impediment to exercise has been removed or has become final and not subject to appeal). Upon the giving by Purchaser or Merger Sub to the Stockholder of the Exercise Notice and the tender of the aggregate Exercise Price, Purchaser or Merger Sub, as the case may be, will be deemed to be the holder of record of the Shares transferable upon such exercise, notwithstanding that the stock transfer books of the Company are then closed or that certificates representing such Shares have not been actually delivered to Purchaser. Notwithstanding the termination of this Agreement, Purchaser will be entitled to purchase the Shares subject to the Purchase Option if it has exercised the Purchase Option in accordance with the terms hereof prior to the termination of this Agreement and the termination of this Agreement will not affect any rights hereunder which by their terms do not terminate or expire prior to or as of such termination. Section 12. Conditions To Closing. The obligation of each Stockholder to --------------------- sell such Stockholder's Shares to Purchaser or Merger Sub hereunder is subject to the conditions that (i) all waiting periods, if any, under the HSR Act, applicable to the sale of the Shares or the acquisition of the Shares by Purchaser or Merger Sub, as the case may be, hereunder have expired or have been terminated; (ii) all consents, approvals, orders or authorizations of, or registrations, declarations or filings with, any court, administrative agency or other Governmental Entity, if any, required in connection with the sale of the Shares or the acquisition of the Shares by Purchaser or Merger Sub hereunder have been obtained or made; and (iii) no preliminary or permanent injunction or other order by any court of competent jurisdiction prohibiting or otherwise restraining such sale or acquisition is in effect. Section 13. Closing. At any Closing with respect to Shares beneficially ------- owned by a Stockholder, (a) such Stockholder will deliver to Purchaser, Merger Sub or their respective designee a certificate or certificates in definitive form representing the number of the Shares designated by Purchaser or Merger Sub, as the case may be, in its Exercise Notice, such certificate to be registered in the name of Purchaser, Merger Sub or their respective designee and (b) Purchaser or Merger Sub, as the case may be, will deliver to the Stockholder the aggregate Exercise Price for the Shares so designated and being purchased by wire transfer of immediately available funds. Section 14. Survival of Representations and Warranties. All ------------------------------------------ representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive for twelve months after the termination hereof. The covenants and agreements made herein will survive in accordance with their respective terms. Section 15. Expenses. Except as otherwise provided in the Merger -------- Agreement, all costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such expenses. Section 16. Counterparts. This Agreement may be executed in two or more ------------ counterparts, all of which shall be considered the same agreement. Section 17. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of Minnesota, without regard to principles of conflicts of laws thereof. Section 18. Notices. All notices and other communications hereunder shall ------- be in writing and shall be deemed given if delivered by hand, mailed by registered or certified mail (return receipt requested) or sent by prepaid overnight courier (with proof of service) or confirmed to facsimile to the parties as follows (or at such other addresses for a party as shall be specified by like notice) and shall be deemed given on the date on which so hand- delivered, or sent by confirmed telecopier and on the day after it has been so mailed or sent by courier: To Purchaser or Merger Sub: The Procter and Gamble Company One Procter and Gamble Plaza Cincinnati, OH 45202 Attention: Treasurer Fax: 513-983-9379 with a copy (which shall not constitute notice) to: Fried, Frank, Harris, Shriver & Jacobson One New York PlazaNew York, NY 10004 Attention: Stephen Fraidin (P.C.) Fax: 212-859-4000 If to a Stockholder, at the address set forth on Schedule A hereto or to such other address as any party may have furnished to the other parties in writing in accordance herewith. Section 19. Miscellaneous. ------------- -9- (a) This Agreement shall not, nor shall any of the rights or interests hereunder, be assigned by any party hereto or assignable by operation of law or otherwise without the prior written consent of the other parties hereto; provided, however, that Purchaser may assign its rights hereunder to an affiliate, but nothing shall relieve the assignor from its obligations hereunder. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit to the parties hereto and their respective successors and assigns. (b) The headings contained in this Agreement are for reference purposes and shall not affect in any way the meaning or interpretation of this Agreement. In this Agreement, unless the context otherwise requires, words describing the singular number shall include the plural and vice versa, and words denoting any gender shall include all genders and words denoting natural persons shall include corporations and partnerships and vice versa. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be understood to be followed by the words "without limitation." (c) All rights, powers and remedies provided under this Agreement or otherwise available in respect hereof at law or in equity will be cumulative and not alternative, and the exercise of any thereof by either party will not preclude the simultaneous or later exercise of any other such right, power or remedy by such party. Section 20. Severability. Any term or provision of this Agreement which ------------ is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or unenforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. Section 21. Enforcement of Agreement; Waiver of Jury Trial. (a) The ---------------------------------------------- parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with its specific terms or was otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court, this being in addition to any other remedy to which they are entitled at law or in equity. (b) Each of the parties irrevocably and unconditionally waives, to the fullest extent permitted by applicable law, any and all rights to trial by jury in connection with any litigation arising out of or relating to this Agreement. Section 22. Waiver, Etc. Any provision of this Agreement may be waived at ----------- any time by the party that is entitled to the benefits thereof. No such waiver, amendment or supplement will be effective unless in writing and signed by the party or parties sought to be bound thereby. Any waiver by any party of a breach of any provision of this Agreement will not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Agreement. The failure of a party to insist upon strict adherence to any term of this Agreement or one or more sections hereof will not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Section 23. Amendment. This Agreement may not be amended, except by an ---------- instrument in writing signed on behalf of each of the parties. Section 24. Further Assurances. (a) Each party hereto will execute and ------------------ deliver all other documents and instruments and take all other actions that may be reasonably necessary in order to consummate the transactions provided for by such exercise. (b) Each of the Stockholders will execute and deliver all documents and instruments and take all other actions that may be reasonably necessary to permit the Purchaser to exercise all rights granted to the Purchaser by such Stockholder and obtain all benefits contemplated under this Agreement with respect to the rights granted by such Stockholder. Section 25. Publicity. A Stockholder shall not issue any press release or --------- otherwise make any public statements with respect to this Agreement or the Merger Agreement or the other transactions contemplated hereby or thereby without the consent of Purchaser and Merger Sub; provided, however, that a Stockholder may, without the prior consent of Purchaser and Merger Sub, issue a press release or otherwise make such public statement as may be required by Law if it has used all reasonable efforts to consult with Purchaser and Merger Sub and to obtain Purchaser and Merger Sub's consent but has been unable to do so in a timely manner. Section 26. Stockholder Capacity. No person executing this Agreement -------------------- makes any agreement or understanding herein in such Stockholder's capacity as a director or officer of the Company. Each Stockholder signs solely in such Stockholder's capacity as the beneficial owner of such Stockholder's Shares and nothing herein shall limit or affect any actions taken by a Stockholder in such Stockholder's capacity as an officer or director of the Company to the extent specifically permitted by the Merger Agreement. Section 27. Lien. (a) Brian F. Sullivan ("Sullivan") represents that the ---- shares of Company Common Stock set forth opposite his name on Schedule A are subject to Liens as described in Schedule B. Sullivan agrees that (i) by 5:00 p.m. on August 27, 1999, 80% of such shares of Company Common Stock will no longer be subject to such Lien or any other Lien and (ii) by 5:00 p.m. on -11- September 1, 1999, no such shares will be subject to such Lien or any other Lien. Sullivan agrees that he will not permit the holder of such Lien to obtain any rights in the shares of Company Common Stock, including by foreclosure, and will take all actions necessary or advisable to prevent such holder from obtaining such rights. (b) William F. Wanner, Jr. and WEC, Inc., jointly and severally represent that the shares of Company Common Stock set forth opposite their respective names on Schedule A are subject to Liens as described in Schedule B. Wanner and WEC, Inc. agree that (i) by 5:00 p.m. on August 27, 1999, 80% of such shares (in the aggregate) will no longer be subject to such Lien or any other Lien and (ii) by 5:00 p.m. on September 1, 1999, no such shares will be subject to such Lien or any other Lien. Wanner and WEC, Inc. agree that he will not permit the holder of such Lien to obtain any rights in the shares of Company Common Stock, including by foreclosure, and will take all actions necessary or advisable to prevent such holder from obtaining such rights. Section 27. Enforcement of Agreement. The parties hereto agree that ------------------------ irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with its specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court, this being in addition to any other remedy to which they are entitled at law or in equity. IN WITNESS WHEREOF, each of the Purchaser and Merger Sub has caused this Agreement to be signed by its officer or director thereunto duly authorized and each Stockholder has signed this Agreement, all as of the date first written above. THE PROCTER & GAMBLE COMPANY /s/ Gretchen W. Price By:____________________________________ Name: Gretchen W. Price Title: Treasurer TENZING, INC. /s/ Gretchen W. Price By:____________________________________ Name: Gretchen W. Price Title: WEC, INC. /s/ William F. Wanner, Jr. By:____________________________________ Name: William F. Wanner, Jr. Title: /s/ William F. Wanner, Jr. _______________________________________ William F. Wanner, Jr. /s/ Brian F. Sullivan _______________________________________ Brian F. Sullivan -13- SCHEDULE A
Stockholder Address Number of Number of Number of Number of Shares Options Warrants Rights WEC, Inc. (formerly 1204 Chestnut Ave. 596,100 -0- -0- 596,100 known as Wanner Minneapolis, MN 55403 Engineering, Inc.) William F. Wanner, Jr. 1204 Chestnut Ave. 58,050 8,000 -0- 58,050 Minneapolis, MN 55403 Brian F. Sullivan 9300 North 75th Ave. 408,500 371,500 -0- 408,500 Minneapolis, MN 55428 - -------------------------------------------------------------------------------------------------------------
SCHEDULE B 1. The shares of Common Stock owned by WEC, Inc. are subject to a lien in favor of Firstar Bank of Minnesota, N.A. ( "Firstar Bank") in connection with a Credit Agreement between WEC, Inc. and the Bank. 2. The shares of Common Stock owned by William F. Wanner, Jr. are subject to a lien in favor of Bank Windsor ("Windsor Bank") in connection with a loan from the Bank to Mr. Wanner. 3. The shares of Common Stock owned by Brian F. Sullivan are held in margin accounts at certain brokers from whom Mr. Sullivan has obtained margin loans. EX-99.(C)(3) 13 STOCK OPTION AGREEMENT DATED AS OF 8/26/1999 ====================================== STOCK OPTION AGREEMENT by and between RECOVERY ENGINEERING, INC. and THE PROCTER AND GAMBLE COMPANY Dated as of August 26, 1999 ====================================== STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT, dated as of August 26, 1999 (this "Agreement"), by --------- and between Recovery Engineering, Inc., a Minnesota corporation (the "Company"), ------- and The Procter and Gamble Company, an Ohio corporation ("Grantee"). ------- RECITALS WHEREAS, the Company, Grantee and Tenzing, Inc., a Minnesota corporation and a wholly owned subsidiary of Grantee ("Merger Sub"), have entered into an ---------- Agreement and Plan of Merger, dated as of the date hereof (as the same may be amended and supplemented, the "Merger Agreement"; defined terms used but not ---------------- defined herein have the meanings set forth in the Merger Agreement), providing for, among other things, an Offer by Merger Sub for all the outstanding shares of common stock, par value $0.01 per share, of the Company (the "Company Common -------------- Stock") and, subsequent thereto, assuming the Offer is consummated on the terms - ----- set forth in the Offer Documents and all the other conditions to the Merger are satisfied or waived, the Merger of Merger Sub with and into the Company with the Company as the surviving corporation in the Merger, pursuant to which the Company will become a wholly owned subsidiary of Grantee; and WHEREAS, as a condition and inducement to each of Grantee's and Merger Sub's willingness to enter into the Merger Agreement, Grantee has requested that the Company agree, and the Company has agreed, to grant Grantee the Option (as defined below). NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, the Company and Grantee agree as follows: Section 1. Grant of Option. Subject to the terms and conditions set forth --------------- herein, the Company hereby grants to Grantee an irrevocable option (the "Option") to purchase up to 1,202,875 (as adjusted as set forth herein) shares ------ (the "Option Shares") of Company Common Stock, at a purchase price of $35.25 (as ------------- adjusted as set forth herein) per Option Share (the "Purchase Price"); provided, -------------- -------- however, that in no event shall the number of Option Shares exceed 19.9% of the - ------- capital stock entitled to vote generally for the election of directors of the Company that is issued and outstanding at the time of exercise (without giving effect to the Option Shares issued or issuable under the Option) (the "Maximum ------- Applicable Percentage"). The number of Option Shares purchasable upon exercise - --------------------- of the Option and the Option Price is subject to adjustment as set forth herein and subject to Section 9(b). Section 2. Exercise of Option. (a) Grantee may exercise the Option, with ------------------ respect to any or all of the Option Shares at any time, subject to the provisions of Section 2(c), after the occurrence of any event as a result of which the Grantee is entitled to receive a Termination Fee pursuant to Section 9.3 of the Merger Agreement (a "Purchase -------- Event") (regardless of whether the Merger Agreement is actually terminated and - ----- whether such Termination Fee is then actually paid); provided, however, that (i) -------- ------- except as provided in the last sentence of this Section 2(a), the Option will terminate and be of no further force and effect upon the earliest to occur of (A) the Effective Time, (B) termination of the Merger Agreement in accordance with its terms other than upon, during the continuance of, or after, a Purchase Event or an event which could lead to a Purchase Event, and (C) 120 days after the first occurrence of a Purchase Event, and (ii) any purchase of Option Shares upon exercise of the Option will be subject to compliance with the HSR Act and the obtaining or making of any consents, approvals, orders, notifications, filings, expiration of applicable waiting periods or authorizations, the failure of which to have obtained or made would have the effect of making the purchase of Option Shares by Grantee illegal (the "Regulatory Approvals"). -------------------- Notwithstanding the termination of the Option, Grantee will be entitled to purchase the Option Shares if it has exercised the Option in accordance with the terms hereof prior to the termination of the Option and the termination of the Option will not affect any rights hereunder (including, without limitation, Section 7 hereof) which by their terms do not terminate or expire prior to or as of such termination. (b) In the event that Grantee is required to, or is entitled to and wishes to exercise the Option, it will send to the Company a written notice (an "Exercise Notice"; the date of which being herein referred to as the "Notice --------------- ------ Date") to that effect which Exercise Notice also specifies the number of Option - ---- Shares, if any, Grantee wishes to purchase, the number of Option Shares, if any, with respect to which Grantee wishes to exercise its Cash-Out Right (as defined herein) pursuant to Section 7(c), the denominations of the certificate or certificates evidencing the Option Shares which Grantee wishes to purchase and a date (an "Option Closing Date"), subject to the following sentence, not later ------------------- than 20 business days from the Notice Date for the closing of such purchase (an "Option Closing"). Any Option Closing will be at an agreed location and time in -------------- New York, New York on the applicable Option Closing Date or at such later date as may be necessary so as to comply with the provisions of Section 2(c). (c) Notwithstanding anything to the contrary contained herein, any exercise of the Option and purchase of Option Shares shall be subject to compliance with applicable Laws, which may prohibit the purchase of any or all of the Option Shares specified in the Exercise Notice without first obtaining or making certain Regulatory Approvals. In such event, if the Option is otherwise exercisable and Grantee wishes to exercise the Option, the Option may be exercised in accordance with Section 2(b) and Grantee shall acquire the maximum number of Option Shares specified in the Exercise Notice that Grantee is then permitted to acquire under the applicable Laws, and if Grantee thereafter obtains the Regulatory Approvals to acquire the remaining balance of the Option Shares specified in the Exercise Notice, then Grantee shall be entitled to acquire such remaining balance. The Company agrees to use its reasonable best efforts to assist Grantee in seeking the Regulatory Approvals and Grantee agrees to use its reasonable best efforts to obtain such Regulatory Approvals as promptly as practicable. -2- In the event that Grantee exercised the Option and either (i) Grantee receives official notice that a Regulatory Approval required for the purchase of any Option Shares will not be issued or granted or (ii) such Regulatory Approval has not been issued or granted within six months of the date of the Exercise Notice, then Grantee shall have the right, but not the obligation, to exercise its Cash-Out Right pursuant to Section 7(c) with respect to the Option Shares for which such Regulatory Approval will not be issued or granted or has not been issued or granted. Section 3. Payment and Delivery of Certificates. (a) At any Option ------------------------------------ Closing, Grantee will pay to the Company in immediately available funds by wire transfer to a bank account designated in writing by the Company an amount equal to the Purchase Price multiplied by the number of Option Shares to be purchased at such Option Closing. (b) At any Option Closing, simultaneously with the delivery of immediately available funds as provided in Section 3(a), the Company will deliver to Grantee a certificate or certificates representing the Option Shares to be purchased at such Option Closing, which Option Shares will be free and clear of all Liens. If at the time of issuance of the Option Shares hereunder, the Company shall have issued any rights or other securities which are attached to or otherwise associated with the Company Common Stock, then each Option Share shall also represent such rights or other securities with terms substantially the same as, and at least as favorable to the Grantee as are provided under any shareholder rights agreement or similar agreement of the Company then in effect. (c) Certificates for the Option Shares delivered at an Option Closing will have typed or printed thereon a restrictive legend which will read substantially as follows: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE." It is understood and agreed that the legend will be removed by delivery of substitute certificate(s) without such reference if such Option Shares have been registered pursuant to the Securities Act, such Option Shares have been sold in reliance on and in accordance with Rule 144 under the Securities Act or Grantee has delivered to the Company a copy of a letter from the staff of the SEC, or an opinion of counsel in form and substance reasonably satisfactory to the Company and its counsel, to the effect that such legend is not required for purposes of the Securities Act. Section 4. Covenants of the Company. In addition to its other agreements ------------------------ and covenants herein, the Company agrees: -3- (a) Shares Reserved for Issuance. To maintain, free from preemptive ---------------------------- rights, sufficient authorized but unissued or treasury shares of Company Common Stock so that the Option may be fully exercised without additional authorization of Company Common Stock after giving effect to all other options, warrants, convertible securities and other rights of third parties to purchase shares of Company Common Stock from the Company, and to issue the appropriate number of shares of Company Common Stock pursuant to the terms of this Agreement. (b) No Avoidance. Not to avoid or seek to avoid (whether by charter ------------ amendment or through reorganization, consolidation, merger, issuance of rights, dissolution or sale of assets, or by any other voluntary act) the observance or performance of any of the covenants, agreements or conditions to be observed or performed hereunder by the Company. Section 5. Representations and Warranties of the Company. The Company --------------------------------------------- hereby represents and warrants to Grantee as follows: (a) Merger Agreement. The Company hereby makes each of the ---------------- representations and warranties contained in Sections 4.3, 4.5, 4.6, 4.21 and 4.22 of the Merger Agreement as they relate to the Company and this Agreement, as if such representations and warranties were set forth herein. (b) Authorized Stock. The Company has taken all necessary corporate ---------------- and other action to authorize and reserve and, subject to the expiration or termination of any required waiting period under the HSR Act, to permit it to issue, and, at all times from the date hereof until the obligation to deliver Option Shares upon the exercise of the Option terminates, shall have reserved for issuance, upon exercise of the Option, shares of Company Common Stock necessary for Grantee to exercise the Option, and the Company will take all necessary corporate action to authorize and reserve for issuance all additional shares of Company Common Stock or other securities which may be issued pursuant to Section 7 upon exercise of the Option. The shares of Company Common Stock to be issued upon due exercise of the Option, including all additional shares of Company Common Stock or other securities which may be issuable upon exercise of the Option or any other securities which may be issued pursuant to Section 7, upon issuance pursuant hereto, will be duly and validly issued, fully paid and nonassessable, and will be delivered free and clear of all Liens, including without limitation, any preemptive rights of any shareholder of the Company. (c) Takeover Statutes. The Company's Board of Directors has taken all ----------------- appropriate and necessary actions such that Sections 302A.671, 302A.673 and 302A675 of the MBCA are inapplicable to the execution and delivery of this Agreement and to the consummation of the transactions contemplated hereby. No other takeover Law as in effect on the date hereof is applicable to the execution and delivery of this Agreement, the Company Common Stock issuable hereunder or to the other transactions contemplated by this Agreement. No anti- takeover provision contained in the Company's articles of incorporation, by-laws or agreements is applicable to the execution and -4- delivery of this Agreement, the Company Common Stock issuable hereunder or to the other transactions contemplated by this Agreement. Section 6. Representations and Warranties of Grantee. Grantee ----------------------------------------- hereby represents and warrants to the Company that any Option Shares or other securities acquired by Grantee upon exercise of the Option will not be transferred or otherwise disposed of except in a transaction registered, or exempt from registration, under the Securities Act. Section 7. Adjustment Upon Changes in Capitalization, etc. (a) ---------------------------------------------- In the event of any change in the Company Common Stock by reason of a stock dividend, split-up, reverse stock split, merger, recapitalization, combination, exchange of shares, or similar transaction, the type and number of shares or securities subject to the Option, and the Purchase Price thereof, will be adjusted appropriately, and proper provision will be made in the agreements governing such transaction, so that Grantee will receive upon exercise of the Option the number and class of shares or other securities or property that Grantee would have received in respect of Company Common Stock if the Option had been exercised immediately prior to such event or the record date therefor, as applicable. Subject to Section 1, and without limiting the parties' relative rights and obligations under the Merger Agreement, if any additional shares of Company Common Stock are issued after the date of this Agreement (other than pursuant to an event described in the first sentence of this Section 7(a)), the number of shares of Company Common Stock subject to the Option will be adjusted so that, after such issuance, it equates the Maximum Applicable Percentage. (b) Without limiting the parties' relative rights and obligations under the Merger Agreement, in the event that the Company enters into an agreement (i) to consolidate with or merge into any person, other than Grantee or one of its subsidiaries, and the Company will not be the continuing or surviving corporation in such consolidation or merger, (ii) to permit any person, other than Grantee or one of its subsidiaries, to merge into the Company and the Company will be the continuing or surviving corporation, but in connection with such merger, the shares of Company Common Stock outstanding immediately prior to the consummation of such merger will be changed into or exchanged for stock or other securities of the Company or any other person or cash or any other property, or the shares of Company Common Stock outstanding immediately prior to the consummation of such merger will, after such merger, represent less than 50% of the outstanding voting securities of the merged company, or (iii) to sell or otherwise transfer all or substantially all of its assets to any person, other than Grantee or one of its subsidiaries, then, and in each such case, the agreement governing such transaction will make proper provision so that the Option will, upon the consummation of any such transaction and upon the terms and conditions set forth herein, be converted into, or exchanged for, an option with identical terms appropriately adjusted to acquire the number and class of shares or other securities or property that Grantee would have received in respect of Company Common Stock if the Option had been exercised immediately prior to such consolidation, merger, sale, or -5- transfer, or the record date therefor, as applicable, and make any other necessary adjustments. (c) If, at any time during the period commencing on a Purchase Event and ending on the termination of the Option in accordance with Section 2, Grantee sends to the Company an Exercise Notice indicating Grantee's election to exercise its right (the "Cash-Out Right") pursuant to this Section 7(c), then -------------- the Company shall pay to Grantee, on the Option Closing Date, in exchange for the cancellation of the Option with respect to such number of Option Shares as Grantee specifies in the Exercise Notice, an amount in cash equal to such number of Option Shares multiplied by the difference between (i) the average closing price, for the 10 NASDAQ/National Market System ("NASDAQ/NMS") trading days ---------- commencing on the 12th NASDAQ/NMS trading day immediately preceding the Notice Date, per share of Company Common Stock as reported on the NASDAQ/NMS (or, if not listed on the NASDAQ/NMS, as reported on any other national securities exchange or national securities quotation system on which the Company Common Stock is listed or quoted, as reported in The Wall Street Journal (Northeast ----------------------- edition), or, if not reported therein, any other authoritative source) (the "Closing Price") and (ii) the Purchase Price. Notwithstanding the termination ------------- of the Option, Grantee will be entitled to exercise its rights under this Section 7(c) if it has exercised such rights in accordance with the terms hereof prior to the termination of the Option. Section 8. Registration Rights. The Company will, if requested by Grantee ------------------- at any time and from time to time within two years of the exercise of the Option (a "Demand Registration"), as expeditiously as possible prepare and file up to ------------------- two registration statements under the Securities Act if such registration is necessary in order to permit the sale or other disposition of any or all Option Shares or securities that have been acquired by or are issuable to Grantee upon exercise of the Option in accordance with the intended method of sale or other disposition stated by Grantee, including a "shelf" registration statement under Rule 415 under the Securities Act or any successor provision, and the Company will use its best efforts to qualify such Option Shares or other securities under any applicable state securities laws. The Company will use best efforts to cause each such registration statement to become effective when requested by Grantee, to obtain all consents or waivers of other parties which are required therefor, and to keep such registration statement effective for such period not in excess of 180 calendar days from the day such registration statement first becomes effective as may be reasonably necessary to effect such sale or other disposition. The obligations of the Company hereunder to file a registration statement and to maintain its effectiveness may be suspended for up to 60 consecutive calendar days if the Board of Directors of the Company shall have determined in good faith that the filing of such registration statement or the maintenance of its effectiveness would be seriously detrimental to the Company; provided, however, that the suspension of the Company's obligations may occur - -------- ------- only one time in any six-month period; provided, further, that any requested -------- ------- registration suspended hereunder will not count for purposes of requests for Demand Registrations to which Grantee is entitled hereunder. All expenses related to a registration statement prepared and filed under this Section 8, and any sale covered thereby, will be at the Company's -6- expense, except for underwriting discounts or commissions. Grantee will provide all information reasonably requested by the Company for inclusion in any registration statement to be filed hereunder. If, during the time periods referred to in the first sentence of this Section 8, the Company effects a registration under the Securities Act of Company Common Stock for its own account or for any other shareholders of the Company (other than on Form S-4 or Form S-8, or any successor form), it will allow Grantee the right to participate in such registration, and such participation will not affect the obligation of the Company to effect Demand Registrations for Grantee under this Section 8; provided, that, if the managing underwriters of such offering advise the Company - -------- ---- in writing that in their opinion the number of shares of Company Common Stock requested to be included in such registration exceeds the number which can be sold in such offering or could materially impact the marketing or prices of such offering, the Company will include the shares requested to be included therein by Grantee pro rata with the shares intended to be included therein by the Company and any other seller of securities under such registration statement. In connection with any registration pursuant to this Section 8, the Company and Grantee will provide each other and any underwriter of the offering with customary representations, warranties, covenants, indemnification, and contribution in connection with such registration. Section 9. Limitation on Profit. (a) Notwithstanding any other provision -------------------- of this Agreement, in no event shall Grantee's Total Profit (as defined below) plus any Termination Fee paid to Grantee pursuant to Section 9.3 of the Merger Agreement exceed in the aggregate $11,865,000 and, if the total amount that otherwise would be received by Grantee would exceed such amount, Grantee, at its sole election, shall either (i) reduce the number of shares of Company Common Stock subject to the Option, (ii) deliver to the Company for cancellation Option Shares previously purchased by Grantee against the refund of the purchase price therefor, (iii) pay cash to the Company or (iv) any combination thereof, so that Grantee's actually realized Total Profit, when aggregated with such Termination Fee so paid to Grantee, shall not exceed $11,865,000, based on the transaction value after taking into account the foregoing actions. (b) Notwithstanding any other provision of this Agreement, the Option may not be exercised for a number of Option Shares as would, as of the date of exercise, result in a Notional Total Profit (as defined below) which, together with any Termination Fee theretofore paid to Grantee, and after giving effect to any election made by Grantee under Section 9(a), would exceed $11,865,000; provided, that nothing in this sentence shall restrict any exercise -------- of the Option permitted hereby on any subsequent date. (c) As used herein, the term "Total Profit" shall mean the ------------ aggregate amount (before taxes) of the following: (i) the amount received by Grantee pursuant to the Grantee's exercise of the Cash-Out Right, (ii)(x) the net cash amounts or the fair market value of any property received by Grantee pursuant to the sale of Option Shares (or (A) any other securities into which such Option Shares are converted or exchanged or (B) any property, cash or other securities received pursuant to adjustments -7- under Section 7 or delivered pursuant to Section 3(b) ("Additional Property")) ------------------- to any unaffiliated party, but in no case less than the fair market value of such Option Shares at the time of such sale, less (y) the Grantee's purchase price of such Option Shares, and (iii) the net cash amounts received by Grantee on the transfer (in accordance with Section 16(a) hereof) of the Option (or any portion thereof) to any unaffiliated party. (d) As used herein, the term "Notional Total Profit" with --------------------- respect to any number of Option Shares as to which Grantee may propose to exercise the Option shall be the Total Profit determined as of the date of such proposal assuming for such purpose that the Option were exercised on such date for such number of Option Shares and assuming that (i) such Option Shares (or any other securities into which such Option Shares are converted or exchanged), together with all other Option Shares held by Grantee and its affiliates as of such date, were sold for cash at the closing market price on the NASDAQ/NMS for the Company Common Stock as of the close of business on the preceding trading day (less customary brokerage commissions) and (ii) the Additional Property is disposed of for fair market value. Section 10. Listing. If Company Common Stock or any other securities to ------- be acquired upon exercise of the Option are then listed on the NASDAQ/NMS (or any other national securities exchange or national securities quotation system), the Company, upon the request of Grantee, will promptly file an application to list the shares of Company Common Stock or other securities to be acquired upon exercise of the Option on the NASDAQ/NMS (and any other such national securities exchange or national securities quotation system) and will use its best efforts to obtain approval of such listing as promptly as practicable. Section 11. Survival of Representations and Warranties. All ------------------------------------------ representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive for twelve months after the termination of the Option. The covenants and agreements made herein will survive in accordance with their respective terms. Section 12. Expenses. Except as otherwise provided in the Merger -------- Agreement, all costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such expenses. Section 13. Counterparts. This Agreement may be executed in two or more ------------ counterparts, all of which shall be considered the same agreement. Section 14. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of Minnesota, without regard to principles of conflicts of laws thereof. Section 15. Notices. All notices and other communications hereunder shall ------- be in writing and shall be deemed given if delivered by hand, mailed by registered or certified mail (return receipt requested) or sent by prepaid overnight courier (with proof of service) or confirmed to facsimile to the parties as follows (or at such other addresses for a party -8- as shall be specified by like notice) and shall be deemed given on the date on which so hand-delivered, or sent by confirmed telecopier and on the day after it has been so mailed or sent by courier: To Grantee: The Procter and Gamble Company One Procter and Gamble Plaza Cincinnati, OH 45202 Attention: Treasurer Fax: 513-983-9379 with a copy (which shall not constitute notice) to: Fried, Frank, Harris, Shriver & Jacobson One New York Plaza New York, NY 10004 Attention: Stephen Fraidin (P.C.) Fax: 212-859-4000 To the Company: Recovery Engineering, Inc. 9300 North 75/th/ Street Minneapolis, MN 55428 Attention: Chief Executive Officer Fax: 612-315-5508 -9- with a copy (which shall not constitute notice) to: Robins, Kaplan, Miller & Ciresi L.L.P. 2800 LaSalle Plaza 800 LaSalle Avenue Minneapolis, MN 55402 Attention: Eric O. Madison, Esq. Fax: 612-339-4181 Section 16. Miscellaneous. (a) This Agreement shall not, nor shall any of ------------- the rights or interests hereunder, be assigned by any party hereto or assignable by operation of law or otherwise without the prior written consent of the other parties hereto; provided, however, that Purchaser may assign its rights hereunder to an affiliate, but nothing shall relieve the assignor from its obligations hereunder. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit to the parties hereto and their respective successors and assigns. (b) The headings contained in this Agreement are for reference purposes and shall not affect in any way the meaning or interpretation of this Agreement. In this Agreement, unless the context otherwise requires, words describing the singular number shall include the plural and vice versa, and words denoting any gender shall include all genders and words denoting natural persons shall include corporations and partnerships and vice versa. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be understood to be followed by the words "without limitation." (c) All rights, powers and remedies provided under this Agreement or otherwise available in respect hereof at law or in equity will be cumulative and not alternative, and the exercise of any thereof by either party will not preclude the simultaneous or later exercise of any other such right, power or remedy by such party. Section 17. Severability. Any term or provision of this Agreement which ------------ is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or unenforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. Section 18. Enforcement of Agreement; Waiver of Jury Trial. (a) The ---------------------------------------------- parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with its specific terms or was otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce -10- specifically the terms and provisions hereof in any court, this being in addition to any other remedy to which they are entitled at law or in equity. (b) Each of the parties irrevocably and unconditionally waives, to the fullest extent permitted by applicable law, any and all rights to trial by jury in connection with any litigation arising out of or relating to this Agreement. Section 19. Extension of Time, Waiver, Etc. The Company ------------------------------ and Grantee may: (a) extend the time for the performance of any of the obligations or acts of the other party; (b) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered pursuant hereto; or (c) waive compliance with any of the agreements or conditions of the other party contained herein; provided, however, that no failure or delay by the Company or Grantee in exercising any right hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right hereunder. Any agreement on the part of a party hereto to any extension or waiver contemplated by this Section 19 shall be valid only if set forth in an instrment in writing signed on behalf of such party. Section 20. Amendment. This Agreement may not be amended, ---------- except by an instrument in writing signed on behalf of each of the parties. Section 21. Further Assurances. In the event of any ------------------ exercise of the Option by Grantee, the Company and Grantee will execute and deliver all other documents and instruments and take all other actions that may be reasonably necessary in order to consummate the transactions provided for by such exercise. -11- IN WITNESS WHEREOF, the Company and Grantee have each caused this Agreement to be signed by their respective officers thereunto duly authorized as of the day and year first written above. THE PROCTER AND GAMBLE COMPANY /s/ Gretchen W. Price By: ___________________________ Name: Gretchen W. Price Title: Treasurer RECOVERY ENGINEERING, INC. /s/ Brian F. Sullivan By: ___________________________ Name: Brian F. Sullivan Title: Chairman -12- EX-99.(C)(4) 14 CONFIDENTIALITY AGREEMENT [LETTERHEAD OF GOLDMAN, SACHS & CO. APPEARS HERE] Goldman Sachs PERSONAL AND CONFIDENTIAL - ------------------------- June 24, 1999 The Procter & Gamble Company One Procter & Gamble Plaza Cincinnati, OH 45202 Attention: Mr. John Zuske Director, Acquisitions & Divestitures Coordination Ladies and Gentlemen: In connection with your consideration of a possible transaction with Recovery Engineering, Inc. (the "Company"), you have requested information concerning the Company. As a condition to your being furnished such information, you agree to treat any information concerning the Company (whether prepared by the Company, its advisors or otherwise) which is furnished to you by or on behalf of the Company (herein collectively referred to as the "Evaluation Material") in accordance with the provisions of this letter and to take or abstain from taking certain other actions herein set forth. The term "Evaluation Material" does not include information which (i) is already in your possession, provided that such information is not known by you to be subject to another confidentiality agreement with or other obligation of secrecy to the Company or another party, or (ii) becomes generally available to the public other than as a result of a disclosure by you or your directors, officers, employees, agents or advisors, or (iii) becomes available to you on a non-confidential basis from a source other than the Company or its advisors, provided that such source is not known by you to be bound by a confidentiality agreement with or other obligation of secrecy to the Company or another party. You hereby agree that the Evaluation Material will be used solely for the purpose of evaluating a possible transaction between the Company and you, and that such information will be kept confidential by you and your advisors; provided, however, that (i) any of such information may be disclosed to your directors, officers and employees and representatives of your advisors who need to know such information for the purpose of evaluating any such possible transaction between the Company and you (it being understood that such directors, officers, employees and representatives shall be informed by you of the confidential nature of such information and shall be directed by you to treat such information confidentially), and (ii) any disclosure of such information may be made to which the Company consents in writing. You agree that, if you are requested or required by judicial or administrative process or by other requirements of law to disclose all or any part of the Evaluation Material to any other person, you will give us sufficient advance notice to enable us to attempt to obtain appropriate protective orders, and The Procter & Gamble Company June 24, 1999 Page Two will cooperate with us in any efforts by us to obtain such protective order or other appropriate remedy. If such protective order or other remedy is not obtained and you are nevertheless, in the opinion of your counsel, compelled to disclose any Evaluation Material, you agree to exercise your best efforts to have confidential treatment accorded to any such information that you are required to disclose. You hereby acknowledge that you are aware, and that you will advise such directors, officers, employees and representatives who are informed as to the matters which are the subject of this letter, that the United States securities laws prohibit any person who has received from an issuer material, non-public information concerning the matters which are the subject of this letter from purchasing or selling securities of such issuer or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities. In addition, without the prior written consent of the Company, you will not, and will direct such directors, officers, employees and representatives not to, disclose to any person either the fact that discussions or negotiations are taking place concerning a possible transaction between the Company and you or any of the terms, conditions or other facts with respect to any such possible transaction, including the status thereof. You agree that, for a period of three years from the date of this letter you will not, directly or indirectly, solicit to employ (whether as an employee, officer, director, agent, consultant or independent contractor) any person who is now employed by the Company. The term "solicit to employ" includes any communications (written, telephonic or oral) from or initiated by you or your representatives or any search or other recruitment entity or person employed by you, to any employee of the Company, but does not include advertising to fill one or more positions in any newspaper of general circulation or industry publication on a basis consistent with your past practice. You agree that all communications regarding any possible transaction, requests for additional information, requests for facility tours or management interviews, or questions regarding procedure shall be submitted or directed to Goldman Sachs and that you will not initiate or maintain contact with any director, officer or employee of the Company with respect to any possible transaction or regarding the business, operations, prospects or finances of the Company, unless the Company shall have otherwise agreed in writing. You acknowledge that money damages would not be a sufficient remedy for any breach of the provisions of this letter and agree that in addition to all other legal or equitable remedies, the Company shall be entitled to equitable relief, including injunction, in the event of any breach of the provisions of this letter. You agree that you shall not oppose the granting of such relief and shall waive any requirement for the securing or posting of any bond in connection with such remedy. The Procter & Gamble Company June 24, 1999 Page Three Although the Company has endeavored to include in the Evaluation Material information known to it which it believes to be relevant for the purpose of your investigation, you understand that neither the Company nor any of its representatives or advisors have made or make any representation or warranty as to the accuracy or completeness of the Evaluation Material. You agree that neither the Company nor its representatives or advisors shall have any liability to you or any of your representatives or advisors resulting from the use of the Evaluation Material. In the event that you do not proceed with the transaction which is the subject of this letter within a reasonable time, or upon the written request of the Company, you shall promptly redeliver to the Company (and such redelivery shall be certified in writing to the Company by an authorized officer supervising such redelivery) all written Evaluation Material and any other written material containing or reflecting any information in the Evaluation Material (whether prepared by the Company, its advisors or otherwise) and will not retain any copies, extracts or other reproductions in whole or in part of such written material. All documents, memoranda, notes and other writings whatsoever prepared by you or your advisors based on the information in the Evaluation Material shall be destroyed, and such destruction shall be certified in writing to the Company by an authorized officer supervising such destruction. You agree that unless and until a definitive agreement between the Company and you with respect to any transaction referred to in the first paragraph of this letter has been executed and delivered, neither the Company nor you will be under any legal obligation of any kind whatsoever with respect to such a transaction by virtue of this or any written or oral expression with respect to such a transaction by any of its directors, officers, employees, agents or any other representatives or its advisors or representatives thereof except, in the case of this letter, for the matters specifically agreed to herein. The agreement set forth in this paragraph may be modified or waived only by a separate writing by the Company and you expressly so modifying or waiving such agreement. No failure or delay by the Company in exercising or enforcing any right or undertaking under this letter shall constitute a waiver of or otherwise prejudice any such rights or undertakings of the Company. The provisions of this letter will expire three years from the date of this letter. The Procter & Gamble Company June 24, 1999 Page Four This letter shall be governed by, and construed in accordance with, the laws of the State of New York. Very truly yours, RECOVERY ENGINEERING, INC. /s/ Goldman, Sachs & Co. By_____________________________________ Goldman, Sachs & Co. on behalf of Recovery Engineering, Inc. Confirmed and Agreed to: THE PROCTER & GAMBLE COMPANY By: /s/ John R. Zuske -------------------------------- Date: 6-24-99 -------------------------------- [LETTERHEAD OF GOLDMAN SACHS APPEARS HERE] Goldman Sachs PERSONAL & CONFIDENTIAL - ----------------------- July 27, 1999 The Procter & Gamble Company One Procter & Gamble Plaza Cincinnati, OH 45202 Attention: Mr. John Zuske Director, Acquisitions & Divestitures Coordination Ladies and Gentlemen: This Agreement supplements our Confidentiality Agreement dated June 24, 1999 (the "Confidentiality Agreement"). 1. Evaluation Material ------------------- The parties acknowledge that Evaluation Material as defined in the Confidentiality Agreement includes, without limitation, the following information regarding or pertaining to a party: technical information and data of all types, patents, trade secrets, manufacturing processes, information regarding operations, costs and pricing, business plans and prospects, budgets, information regarding research and development and other information concerning the present or future business, products or competitive position of the disclosing party. All of such Evaluation Material shall be treated as provided in the Confidentiality Agreement. 2. Prohibition on Use ------------------ The parties agree that no Evaluation Material disclosed to a party will be used in any present or future business activity of the receiving party, including without limitation, to develop new products, technologies or manufacturing processes or techniques. Such limitations do not limit in any way receiving party's, or its affiliates' ability to independently develop new products, technologies or manufacturing processes or techniques without the use of Evaluation Materials. 3. Supplemental Obligations Regarding Return of Evaluation Material ---------------------------------------------------------------- Following return or destruction of all Evaluation Material in tangible form as contemplated by the Confidentiality Agreement, the parties will have a continuing obligation to comply with the confidentiality and non-use provisions as set forth in the Confidentiality Agreement. The Procter & Gamble Company July 27, 1999 Page Two 4. Remedies: Indemnification ------------------------- In addition to the remedies provided in the Confidentiality Agreement, the parties agree that they will be entitled to seek equitable relief, including injunctions and specific performance, for any breach or threatened or prospective breach of the provisions of the Confidentiality Agreement or this Agreement. 5. Continued Effect of Confidentiality Agreement --------------------------------------------- Except as expressly modified or supplemented by this Agreement, the Confidentiality Agreement which you have previously executed will remain in full force and effect in accordance with its terms. In order to record your agreement with the foregoing, please sign and return a copy of this Agreement. THE PROCTER & GAMBLE COMPANY By /s/ John R. Zuske ---------------------------- RECOVERY ENGINEERING, INC. By /s/ Goldman, Sachs & Co. ---------------------------- Goldman, Sachs & Co. on behalf of Recovery Engineering, Inc. Acknowledged and Accepted Agreed to this __ day of ____, 1999 EX-99.(C)(5) 15 CONSULTING AGREEMENT FOR BRIAN SULLIVAN CONSULTING AGREEMENT THIS CONSULTING AGREEMENT (the "Agreement"), dated as of August 26, 1999 between The Procter & Gamble Company, an Ohio corporation and/or its affiliates, ("P&G") and Brian Sullivan ("Sullivan"). Purpose Recovery Engineering, Inc. ("REI") has entered into an Agreement and Plan of Merger (the "Merger Agreement") with The Procter & Gamble Company and Tenzing, Inc. ("Tenzing"), a wholly owned subdiary of The Procter & Gamble Company, dated as of August 26, 1999, pursuant to which, at the "Effective Time" (as defined in the Merger Agreement), REI shall merge with Tenzing (the "Merger"); and Sullivan is the Chief Executive Officer of REI and shall receive significant payments and benefits by reason of the consummation of the Merger, and is desirous that the Merger be so consummated; and P&G desires Sullivan to provide certain consulting services to P&G and Sullivan is willing to provide such services to P&G on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Retention as a Consultant. P&G shall retain Sullivan and Sullivan ------------------------- shall serve P&G as a consultant, on the terms and conditions set forth herein. 2. Term. Sullivan shall be so retained for the period commencing as ---- of the Effective Time and ending upon the payment of the Second Milestone (as defined below), unless terminated earlier pursuant to this Agreement (the "Consulting Term"). The Consulting Term may be terminated by either party ("Non-breaching Party) if the other party breaches its obligations under this Agreement ("Breaching Party") upon ten (10) days' prior written notice, unless the Breaching party cures such breach within such ten (10) day period. If P&G terminates the Consulting Term, P&G shall have no obligations to Sullivan other than to pay the portion of the Fee (defined below), if any, which is accrued and unpaid as of the date of termination. 3. Duties. During the Consulting Term, Sullivan shall render ------ consulting services to P&G with respect to the project involving [Confidential] generally outlined in Attachment 1 (the "Project"). In performing his duties, Sullivan shall deliver the following milestones as part of the Project: (a) [Confidential] (b) [Confidential] Sullivan shall be accountable to B. L. Byrnes or his designee for the Project and Sullivan shall report his progress on the Project to such person on a regular basis. P&G shall provide Sullivan with reasonable resources, consistent with REI past practices, to assist him in fulfilling his duties within the time frames contemplated in this Section 3.; 4. Place of Performance. Sullivan shall perform his duties hereunder -------------------- at REI's 75th Avenue facility in Minneapolis, Minnesota or such other place as reasonably agreed by the parties. 5. Compensation and Related Matters. As full and complete -------------------------------- compensation for the services to be rendered by Sullivan hereunder P&G shall make the following payments to Sullivan: (a) Consulting Fees. Subject to Section 2 hereof, in consideration --------------- for Sullivan providing consulting services hereunder, P&G shall pay Sullivan $500,000 at the First Milestone and $500,000 at the Second Milestone if they are completed within the period set forth above for the entire Consulting Term (the "Fee"). Payments shall be made within fifteen (15) days of P&G's receipt of Sullivan's invoice for services rendered. (b) Reimbursement of Expenses. P&G shall reimburse Sullivan for ------------------------- reasonable business expenses incurred in the performance of Sullivan's duties hereunder upon submission of reasonably satisfactory documentation in accordance with the general policies of P&G. (c) Withholding. Consultant acknowledges that he is not an "employee" ----------- (or person of similar status) of P&G or any of its affiliates for purposes of the Internal Revenue Code of 1996, as amended (the "Code"), and participation in any and all employee benefit plans of P&G or any of its affiliates. Sullivan waives any rights he may have to participate in any employee, fringe benefit or other similar plan of P&G or any of its affiliates. Consultant acknowledges that he will not be paid any "wages" (as defined in the Code) hereunder and that Sullivan shall be solely responsible for all taxes imposed on him by reason of any compensation, benefits or other amounts payable hereunder. -2- 6. Unauthorized Disclosure. Sullivan agrees and understands that in ----------------------- connection with the performance of services hereunder , Sullivan has been and will be exposed to and receive information regarding the business and affairs of P&G and its affiliates. Sullivan agrees that during the Consulting Term and thereafter, he will not (x) use any of such information for himself or for any person, firm, corporation, partnership or other entity or (y) disclose any of such information to any person, firm, corporation, partnership or other entity. This confidentiality covenant has no temporal, geographical or territorial restriction. Sullivan agrees and understands that the provisions of this Section 6 are reasonable and necessary to prevent the improper use or disclosure of confidential information of P&G or its affiliates. 7. Proprietary Rights. Sullivan represents and warrants that all ------------------ patents, patent applications, rights to inventions, copyright registrations and other license, trademark and trade name rights heretofore owned by Sullivan and relating to the business of P&G or any of its subsidiaries have been duly transferred to such corporation. Sullivan shall disclose promptly to P&G any and all inventions, discoveries, improvements and patentable or copyrightable works initiated, conceived or made by him, either alone or in conjunction with others, during the Consulting Term and related to the business or activities of P&G and/or its subsidiaries and he assigns all of his interest therein to P&G or its nominee. Whenever requested to do so by P&G, Sullivan shall execute any and all applications, assignments or other instruments which P&G shall deem necessary to apply for and obtain trademarks, patents or copyrights of the United States or any foreign country or otherwise protect P&G's and/or its subsidiaries' interest therein. These obligations shall continue beyond the conclusion of the Consulting Term with respect to inventions, discoveries, improvements or copyrightable works initiated, conceived or made by Sullivan during the Consulting Term and shall be binding upon Sullivan's employers, assigns, executors, administrators and other legal representatives. 8. Non-Waiver of Rights. The failure to enforce at any time the -------------------- provisions of this Agreement or to require at any time performance by any other party of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or to affect either the validity of this Agreement or any part hereof, or the right of any party to enforce each and every provision in accordance with its terms. 9. Return of Company Property. Sullivan agrees to return to P&G -------------------------- immediately upon termination of the Consulting Term all documents, files, and other property of any kind belonging to P&G. Upon Sullivan's request, P&G shall provide Sullivan a receipt for such returned property. 10. Binding Effect/Assignment. This Agreement shall inure to the ------------------------- benefit of and be binding upon the parties hereto and their respective heirs, executors, personal representatives, estates, successors (including, without limitation, by way of merger) and assigns. Notwithstanding the provisions or the immediately preceding sentence, Sullivan shall not assign all or any portion of this Agreement without the prior written consent of P&G. 11. Notice. For the purposes of this Agreement, notices, demands and ------ all other communications provided for in this Agreement shall be in writing and shall be deemed to -3- have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to Sullivan: Brian Sullivan 1822 Morgan Road Medina, MN 55356 If to P&G: 1 Procter & Gamble Plaza Cincinnati, OH 45202 Attn: Vice President - Corporate New Ventures or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 12. Dispute Resolution. Any disputes under this Agreement shall be ------------------- arbitrated pursuant to the rules of the American Arbitration Association in Minneapolis, Minnesota. 13. Modification of Agreement; Governing Law. No provision of this ---------------------------------------- Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties hereto. No waiver by either party hereto at any time of any breach by the other party hereto, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar of dissimilar provisions or conditions at the same or at any prior or subsequent time. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota without regard to its conflicts of law principles. 14. Severability. If any provision of this Agreement, or any ------------ application thereof to any circumstances, is invalid, in whole or in part, such provision or application shall to that extent be severable and shall not affect other provisions or applications of this Agreement. 15. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument. -4- 16. Entire Agreement. This Agreement sets forth the entire ---------------- understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements, written or oral, between them as to such subject matter. 17. Headings. The headings contained herein are solely for the -------- purposes of reference, are not part of this Agreement and shall not in any way affect the meaning or interpretation of this Agreement. 18. Assignment. Sullivan shall not assign his rights and obligations ----------- under this Agreement. P&G may assign its rights and obligations under this Agreement to an affiliate. -5- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. The Procter & Gamble Company By: /s/ Gretchen W. Price ------------------------------- Name: Gretchen W. Price Title: Treasurer Brian Sullivan /s/ Brian F. Sullivan ---------------------------------- -6- NON-COMPETITION AGREEMENT ------------------------- THIS NON-COMPETITION AGREEMENT (this "Agreement") is made and entered effective as of the 26th day of August, 1999, by and between The Procter & Gamble Company and its affiliates ("P&G"), and Brian Sullivan ("Sullivan"). Purpose: -------- Recovery Engineering, Inc. ("REI") has entered into an Agreement and Plan of Merger (the "Merger Agreement") with The Procter & Gamble Company and Tenzing, Inc. ("Tenzing") , dated as of August 26, 1999, pursuant to which, at the Effective Time (as defined in the Merger Agreement), REI shall merge with Tenzing (the "Merger"); and Sullivan is the Chairman and Chief Executive Officer of REI and shall resign his position at REI on the Effective Date; and Sullivan, in his employment with REI, learned confidential information and trade secrets of REI, and established personal and business relationships with the REI's customers, suppliers and other business associates, and the use by Sullivan of such relationships or information to compete with P&G or to aid others to compete with P&G would have a detrimental effect on the future profitable operation of P&G; and Sullivan has had an opportunity to, and has, reviewed this Agreement and consulted with counsel regarding same; NOW, THEREFORE, in consideration of (i) the above premises and (ii) other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged by Sullivan, Sullivan and P&G hereby covenant and agree as follows: 1. Term and Compensation. The term of this Agreement shall be for a --------------------- period commencing upon the Effective Date and ending three years thereafter (the "Non-Compete Term"). In consideration for Sullivan's obligations under this Agreement, P&G shall pay Sullivan $647,500 on the Effective Date, $647,500 one (1) year after the Effective Date, and $647,500 two (2) years after the Effective Date. 2. Non-Competition and Non-Solicitation Covenants. During the Non-Compete ---------------------------------------------- Term, Sullivan shall not, as an employee (other than as a consultant of P&G), employer, stockholder, officer, director, partner, associate, consultant, advisor, proprietor, lender, or in any other manner or capacity, directly or indirectly, (i) solicit or hire any employee of P&G or otherwise interfere with or disrupt the employment relationship between P&G and any employee, (ii) engage in any business that is competitive with any business or line of business of REI, as it existed prior to the Effective Date (the "Business"), in any country in the world and/or (iii) interfere with or otherwise disrupt the relationship between P&G and any vendor, supplier or client. Notwithstanding (ii) above, nothing herein shall prohibit Sullivan from owning publicly-traded securities of any company that competes with the Business, so long as Sullivan does not indirectly or directly control such company, or is otherwise deemed an affiliate of such company as defined in Rule 144(a)(1) under the Securities Act of 1933, as amended. Sullivan expressly recognizes and agrees that the restraints imposed by this Section 2 are reasonable as to time and geographic scope and not oppressive. Sullivan further expressly recognizes and agrees that the restraints imposed by this Section 2 represent a reasonable and necessary restriction for the protection of the legitimate interests of the P&G, that the failure by Sullivan to observe and comply with the covenants and agreements in this Section will cause irreparable harm to P&G, that it is and will continue to be difficult to ascertain the harm and damages to P&G that such a failure by Sullivan would cause, that the consideration received by Sullivan for entering into these covenants and agreements is fair, that the covenants and agreements and their enforcement will not deprive Sullivan of his ability to earn a reasonable living, and that Sullivan has acquired knowledge and skills in this field that will allow him to obtain employment without violating these covenants and agreements. Sullivan further expressly acknowledges that he has consulted independent counsel, and has reviewed and considered this Agreement with that counsel before executing this Agreement. 3. Memoranda, Notes, Records, Etc. All memoranda, notes, records, ------------------------------ customer lists or other documents made or compiled by Sullivan or otherwise made available to him concerning the business of REI or P&G or its subsidiaries or affiliates shall become P&G's property and shall be delivered to P&G at the Effective Date, except to the extent such documents are necessary for Sullivan to perform his duties under the Consulting Agreement between Sullivan and P&G dated as of an even date herewith, and Sullivan shall retain no copies of those documents. 4. Nondisclosure. ------------- (a) Sullivan hereby acknowledges that in connection with his employment by REI he was exposed to and obtained certain information (including without limitation, procedures, memoranda, notes, records and customer lists whether such information has been or is made, developed or compiled by Sullivan or otherwise has been or is made available to him) regarding the business and operations of REI; Sullivan further acknowledges that such information is unique, valuable, considered trade secrets and deemed proprietary by P&G. For purposes of this Agreement, such information shall be referred to as "Confidential Information", except that the following shall not be considered Confidential Information; (a) information disclosed on a non-confidential basis to third parties by REI and (b) information disclosed and made available to the general public under operation of law. (b) Sullivan agrees that all Confidential Information is and will remain the property of the P&G. Sullivan further agrees, for the duration of the Non-Compete Term and thereafter, to hold in the strictest confidence all Confidential Information, and to not, directly or indirectly, duplicate, sell, use, lease, commercialize, disclose or otherwise divulge to any person or entity any portion of the Confidential Information or use any Confidential Information for his -2- own benefit or profit or allow any person or entity, other than P&G and its authorized employees, to use or otherwise gain access to any Confidential Information. 5. Enforcement. The parties hereto recognize that the covenants of ----------- Sullivan hereunder are special, unique and of extraordinary character. If Sullivan shall breach or fail to perform any term, condition or duty in this Agreement required to be observed or performed by Sullivan, P&G shall be entitled, inter alia, to institute and prosecute proceedings in any court of competent jurisdiction, to enforce the specific performance thereof by Sullivan and to enjoin Sullivan from performing services for any person or entity or otherwise acting in violation of Sections 2, 3 and 4 hereof. In the event of a breach of the provisions of this Agreement, Sullivan agrees that the remedies at law available to P&G would be inadequate to protect P&G's interests; accordingly, Sullivan agrees not to challenge the claim by P&G for any equitable remedy including specific performance on the basis that there are adequate remedies at law. In case of any breach of this Agreement, nothing herein contained shall be construed to prevent P&G from seeking such other remedy in the courts as P&G may elect or invoke. 6. Severability/Modification. If any term or provision of this Agreement ------------------------- is held or deemed to be invalid or unenforceable, in whole or in part, by a court of competent jurisdiction, such term or provision shall be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement. 7. Entire Agreement/Amendment. This instrument contains the entire -------------------------- agreement between the parties hereto with respect to the subject matter hereof, and may be amended only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. 8. Assignment. ---------- (a) Sullivan may not delegate the performance of any of his obligations or duties hereunder, or assign any rights hereunder, without the prior written consent of P&G. Any such purported delegation or assignment in the absence of such written consent shall be null and void with not force or effect. (b) The P&G may not assign this Agreement except to any P&G affiliate. (c) Subject to the limitations imposed by this Section 10, this Agreement shall be binding on and inure to the benefit of the parties hereto and their respective successors, permitted assigns, heirs and legal representatives. 9. Governing Law. THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS ------------- AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA WITHOUT REGARD TO THE LAWS OF CONFLICT OF LAWS. -3- 10. Headings. The section headings herein are for convenience only and -------- shall not be used in interpreting or construing this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. Brian Sullivan: /s/ Brian F. Sullivan --------------------------------- The Procter & Gamble Company: /s/ Gretchen W. Price --------------------------------- By: Gretchen W. Price ------------------------------ Its: Treasurer ----------------------------- -4- Letter of Understanding ----------------------- This Letter of Understanding (the "Agreement") is made and entered effective as of the 26th day of August, 1999, by and between Recovery Engineering, Inc. ("REI") The Procter & Gamble Company and its affiliates ("P&G"), and Brian Sullivan ("Sullivan"). Purpose ------- Recovery Engineering, Inc. ("REI") has entered into an Agreement and Plan of Merger (the "Merger Agreement") with P&G, dated as of August 26, 1999, pursuant to which, at the Effective Time (as defined in the Merger Agreement), REI shall merge with a subsidiary of P&G (the "Merger"); and Brian Sullivan ("Sullivan") is the Chairman and Chief Executive Officer of REI. Sullivan is also a significant shareholder of REI. As mutual inducements for the parties to enter into the Merger Agreement, the parties agree to the following: 1. Options. Sullivan owns 250,000 outstanding stock options which were --------- granted under various REI stock option plans. Pursuant to such plans (including, without limitation, change of control provisions in such plans), Sullivan has the right to exercise such options on or about the Effective Time. Notwithstanding the foregoing, Sullivan agrees that pursuant to the Merger Agreement, at the Effective Time, all of his 250,000 stock options will be canceled. With respect to 215,000 of such 250,000 stock options, Sullivan will have the right to receive the difference between the strike price and the Offer Price ($4,568,750) minus the full amount of the principal and accrued interest (accrued to the Effective Date) under the Note (as defined below). Sullivan will have no rights with respect to the 35,000 stock options. 2. Note. Sullivan has a $497,500 Promissory Note dated April 18, 1997, payable ----- to REI, that bears an interest rate of 9.25% per annum ("Note"). Sullivan's obligations under the Note shall be discharged as a result of the amount due under the Note being deducted from the amount paid to Sullivan pursuant to paragraph 1. 3. Other Agreements. Sullivan has executed a Non-Competition Agreement and a ----------------- Consulting Agreement at an even date herewith. 4. Severance Agreement. Sullivan agrees that REI shall terminate or cause to -------------------- be terminated the Change-in-Control Severance Pay Agreement between REI and Sullivan immediately prior to the Effective Date, such that Sullivan shall have no rights thereunder. Agreed and accepted: Brian Sullivan /s/ Brian F. Sullivan ___________________ Recovery Engineering, Inc. /s/ Brian F. Sullivan ___________________ By: Brian F. Sullivan Chief Executive Officer The Procter & Gamble Company /s/ Gretchen W. Price ________________________ By: Treasurer EX-99.(C)(6) 16 NON-COMPETITION AGREEMENT FOR REED A. WATSON NON-COMPETITION AGREEMENT ------------------------- THIS NON-COMPETITION AGREEMENT (this "Agreement") is made and entered effective as of the 26th day of August, 1999, by and between The Procter & Gamble Company and its affiliates ("P&G"), and Reed Watson ("Watson"). Purpose: -------- Recovery Engineering, Inc. ("REI") has entered into an Agreement and Plan of Merger (the "Merger Agreement") with The Procter & Gamble Company and Tenzing, Inc., ("Tenzing") dated as of August 26, 1999, pursuant to which, at the Effective Time (as defined in the Merger Agreement), REI shall merge with Tenzing (the "Merger"); and Watson is the Chief Operating Officer of REI and shall resign his position at REI on the Effective Date; and Watson, in his employment with REI, learned confidential information and trade secrets of REI, and established personal and business relationships with the REI's customers, suppliers and other business associates, and the use by Watson of such relationships or information to compete with P&G or to aid others to compete with P&G would have a detrimental effect on the future profitable operation of P&G; and Watson has had an opportunity to, and has, reviewed this Agreement and consulted with counsel regarding same; NOW, THEREFORE, in consideration of (i) the above premises and (ii) other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged by Watson, Watson and P&G hereby covenant and agree as follows: 1. Term and Compensation. The term of this Agreement shall be for a --------------------- period commencing upon the Effective Date and ending two years thereafter (the "Non-Compete Term"). In consideration for Watson's obligations under this Agreement, P&G shall pay Watson $425,000 on the Effective Date and $425,000 one (1) year after the Effective Date. 2. Non-Competition and Non-Solicitation Covenants. During the Non-Compete ---------------------------------------------- Term, Watson shall not, as an employee (other than as a consultant of P&G), employer, stockholder, officer, director, partner, associate, consultant, advisor, proprietor, lender, or in any other manner or capacity, directly or indirectly, (i) solicit or hire any employee of P&G or otherwise interfere with or disrupt the employment relationship between P&G and any employee, (ii) engage in any business that is competitive with any business or line of business of REI, as it existed prior to the Effective Date (the "Business), in any country in the world and/or (iii) interfere with or otherwise disrupt the relationship between P&G and any vendor, supplier or client. Notwithstanding (ii) above, nothing herein shall prohibit Watson from owning publicly-traded securities of any company that competes with the Business, so long as Watson does not indirectly or directly control such company, or is otherwise deemed an affiliate of such company as defined in Rule 144(a)(1) under the Securities Act of 1933, as amended. Watson expressly recognizes and agrees that the restraints imposed by this Section 2 are reasonable as to time and geographic scope and not oppressive. Watson further expressly recognizes and agrees that the restraints imposed by this Section 2 represent a reasonable and necessary restriction for the protection of the legitimate interests of the P&G, that the failure by Watson to observe and comply with the covenants and agreements in this Section will cause irreparable harm to P&G, that it is and will continue to be difficult to ascertain the harm and damages to P&G that such a failure by Watson would cause, that the consideration received by Watson for entering into these covenants and agreements is fair, that the covenants and agreements and their enforcement will not deprive Watson of his ability to earn a reasonable living, and that Watson has acquired knowledge and skills in this field that will allow him to obtain employment without violating these covenants and agreements. Watson further expressly acknowledges that he has been encouraged to and has consulted independent counsel, and has reviewed and considered this Agreement with that counsel before executing this Agreement. 3. Memoranda, Notes, Records, Etc. All memoranda, notes, records, ------------------------------ customer lists or other documents made or compiled by Watson or otherwise made available to him concerning the business of REI or P&G or its subsidiaries or affiliates shall P&G's property and shall be delivered to P&G at the Effective Date. 4. Nondisclosure. ------------- (a) Watson hereby acknowledges that in connection with his employment by REI he was exposed to and obtained certain information (including without limitation, procedures, memoranda, notes, records and customer lists whether such information has been or is made, developed or compiled by Watson or otherwise has been or is made available to him) regarding the business and operations of REI; Watson further acknowledges that such information is unique, valuable, considered trade secrets and deemed proprietary by P&G. For purposes of this Agreement, such information shall be referred to as "Confidential Information", except that the following shall not be considered Confidential Information; (a) information disclosed on a non-confidential basis to third parties by REI and (b) information disclosed and made available to the general public under operation of law. (b) Watson agrees that all Confidential Information is and will remain the property of the P&G. Watson further agrees, for the duration of the Non- Compete Term and thereafter, to hold in the strictest confidence all Confidential Information, and to not, directly or indirectly, duplicate, sell, use, lease, commercialize, disclose or otherwise divulge to any person or entity any portion of the Confidential Information or use any Confidential Information for his own benefit or profit or allow any person or entity, other than P&G and its authorized employees, to use or otherwise gain access to any Confidential Information. -2- 5. Enforcement. The parties hereto recognize that the covenants of Watson ----------- hereunder are special, unique and of extraordinary character. If Watson shall breach or fail to perform any term, condition or duty in this Agreement required to be observed or performed by Watson, P&G shall be entitled, inter alia, to institute and prosecute proceedings in any court of competent jurisdiction, to enforce the specific performance thereof by Watson and to enjoin Watson from performing services for any person or entity or otherwise acting in violation of Sections 2, 3 and 4 hereof. In the event of a breach of the provisions of this Agreement, Watson agrees that the remedies at law available to P&G would be inadequate to protect P&G's interests; accordingly, Watson agrees not to challenge the claim by P&G for any equitable remedy including specific performance on the basis that there are adequate remedies at law. In case of any breach of this Agreement, nothing herein contained shall be construed to prevent P&G from seeking such other remedy in the courts as P&G may elect or invoke. 6. Severability/Modification. If any term or provision of this Agreement ------------------------- is held or deemed to be invalid or unenforceable, in whole or in part, by a court of competent jurisdiction, such term or provision shall be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement. 7. Entire Agreement/Amendment. This instrument contains the entire -------------------------- agreement between the parties hereto with respect to the subject matter hereof, and may be amended only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. 8. Assignment. ---------- (a) Watson may not delegate the performance of any of his obligations or duties hereunder, or assign any rights hereunder, without the prior written consent of P&G. Any such purported delegation or assignment in the absence of such written consent shall be null and void with not force or effect. (b) The P&G may not assign this Agreement except to any P&G affiliate. (c) Subject to the limitations imposed by this Section 10, this Agreement shall be binding on and inure to the benefit of the parties hereto and their respective successors, permitted assigns, heirs and legal representatives. 9. Governing Law. THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS ------------- AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA WITHOUT REGARD TO THE LAWS OF CONFLICT OF LAWS. 10. Headings. The section headings herein are for convenience only and -------- shall not be used in interpreting or construing this Agreement. -3- IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. Reed Watson: /s/ Reed Watson ------------------------------- The Procter & Gamble Company: /s/ Gretchen W. Price ------------------------------- By: Gretchen W. Price ---------------------------- Its: Treasurer --------------------------- -4- Letter of Understanding ----------------------- This Letter of Understanding (the "Agreement") is made and entered effective as of the 26th day of August, 1999, by and between Recovery Engineering, Inc. ("REI") The Procter & Gamble Company and its affiliates ("P&G"), and Reed Watson ("Watson"). Purpose ------- Recovery Engineering, Inc. ("REI") has entered into an Agreement and Plan of Merger (the "Merger Agreement") with P&G, dated as of August 26, 1999, pursuant to which, at the Effective Time (as defined in the Merger Agreement), REI shall merge with a subsidiary of P&G (the "Merger"); and Watson is the President and Chief Operating Officer of REI. As mutual inducements for the parties to enter into the Merger Agreement, the parties agree to the following: 1. Options. Watson owns 150,000 outstanding stock options which were granted --------- under various REI stock option plans. Pursuant to such plans (including, without limitation, change of control provisions in such plans), Watson has the right to exercise such options on or about the Effective Time. Notwithstanding the foregoing, Watson agrees that pursuant to the Merger Agreement, at the Effective Time, all of his 150,000 stock options will be canceled. With respect to 98,000 of such 150,000 stock options, Watson will have the right to receive the difference between the strike price and the Offer Price ($2,730,000). Watson will have no rights with respect to the remaining 52,000 stock options. 2. Non-Competition Agreement. Watson has executed a Non-Competition Agreement -------------------------- at an even date herewith. 3. Severance Agreement. Watson agrees that REI shall terminate or cause to be -------------------- terminated the Change-in-Control Severance Pay Agreement between REI and Watson immediately prior to the Effective Date, such that Watson shall not have any rights thereunder. Agreed and accepted: Reed Watson /s/ Reed Watson ___________________ Recovery Engineering, Inc. /s/ Brian F. Sullivan ___________________ By: Brian F. Sullivan Chief Executive Officer The Procter & Gamble Company /s/ Gretchen W. Price ________________________ By: Gretchen W. Price -----END PRIVACY-ENHANCED MESSAGE-----